It is possible to create an offshore investment bond which complies with German law but to be compliant it needs to have several features to the product which are necessary to avoid the bond becoming transparent and taxed on a yearly basis, instead of being taxed on a deferred basis.
Sum assured for a qualifying German investment bond
This does require on-going monitoring of the product so that the sum assured can be altered in line with the growth of the underlying funds. German law requires that an insurance bond contains at least 10% life cover. In other words a sum assured of at least 110%.Care needs to be taken to ensure the underlying investments do not exceed more than 90% of the sum assured. There are a number of ways to do this, with automatically increasing life cover options or by making part surrenders of the investment to ensure compliance.
Personalisation of German bonds
The second issue to be careful with is the “Tailoring” rules. This is shared by other European States, notably France and Spain. If the investment bond can be personalised by the bond holder the investments stop becoming an asset of the bond and become an asset of the client. Should the investment bond be deemed a client asset it would lose the taxation advantage of the funds being able to roll up virtually tax free except for a small tax on dividend called Advanced Corporation tax.
Examples of client choice which could disqualify an investment bond from being compliant under German law would include being able to choose individual shares without receiving advice. Inevitably avoiding falling foul of these rules means limiting the fund choice but it is still possible to invest in a good spread of different risk rated and geographic funds and includes some unit trust funds managed by Investment Houses, Exchange Traded Funds and Life Office Managed funds.
To ensure a sufficient sum assured, these products have to be underwritten and it may be the case that your medical records are requested from your GP surgery. With larger cases it may be necessary to attend a medical for an examination. For unhealthy lives there could be a “loading” which is an increase to the cost of the life cover or possibly a decline for a very serious pre-existing condition.
With a longevity increasing at an increasing rate the costs of increasing the sum assured are often negligible, particularly for younger, healthy lives. It is also possible to add other benefits to the plan, for example if you were making regular monthly payments you could add “waiver of premium” benefit which would pay the monthly premiums if you were unable to work because of illness or accident.
Once the contract has been made compliant you can switch funds without triggering a tax charge. It is possible to add or remove additional lives assured to the plan but care needs to be taken since this could constitute a “chargeable event”.
Whilst offshore bonds can be highly effective investment vehicles for inheritance tax planning, German law does not recognise trusts. Consequently any inheritance tax planning needs to be done without the use of trusts.
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- Always take independent local tax advice before taking out an investment.
This page has been translated into German