Tax Planning Post CRS – Pensions, Insurance and Charities

Howard Bilton – Chairman and Founder of The Sovereign Group

If there was any doubt that any sort of planning could be successful if it relied on disguising the facts and not reporting correctly that doubt has completely disappeared following the introduction of the Common Reporting Standard (CRS). It is not just that CRS has made any attempt to evade tax by “forgetting” to declare offshore income bound to fail. It has also reduced the scope for tax avoidance, mitigation (or whatever is deemed the least offensive word for tax planning). Previously there may have been a temptation to use structures which if examined by the relevant tax authority would be ineffective, relying on the fact that they did not have to be reported so would avoid scrutiny.

All countries with sophisticated tax systems and therefore equally sophisticated anti-avoidance legislation still tend to give favourable tax treatment to charities, insurance and pensions. This is no real surprise. It is a form of social engineering. All of these products relieve governments of burdens that would otherwise fall on them.

It is in the interests of the state to encourage people to give charitably, to ensure their lives and to save for their old age.

If the breadwinners of the family do not ensure their lives, the family may become a burden on the state if the breadwinner dies prematurely or certainly before they have built up sufficient financial resources to look after the family in their absence.

If residents do not save for their retirement their welfare becomes an additional burden on the state.

The state therefore incentivises people to do all these things and the main incentive is a tax break. In the case of all of these products, it is possible to use an existing corporate solution provided by a large company or charity. But it can be very attractive to look at bespoke solutions which give the promoter more control, more flexibility and cut costs.


Charities can be a useful family wealth planning tool. Wealthy families often form their own foundation or charity. A charity is normally a company limited by guarantee or a trust which has as its aim one of these purposes: a) Advancement of education; b) advancement of religion; c) advancement of health or the saving of lives; c) advancement of citizenship or community development; d) advancement of the arts, culture, heritage or science; or e) the relief of poverty.

Generally, tax relief is given for gifts to a charity. The charity itself is exempt from tax and distributions from the charity to the charitable causes can be made without tax consequence. In other words, a charity is a tax efficient vehicle through which money can be donated, invested and distributed. Families with charitable intent can set up their own charity which allows them to retain control of the money, administer it in the way that they like and carefully control the way the money is spent and used – as long as it is for charitable purposes. This can often be a lot more attractive than simply giving a big lump sum to an existing charity. The “private” charity can employ family members on market rate salaries and this is often seen as a much better way of motivating relatives rather than leaving them money in a will which may disincentivise them to work or make their own way in life. Increasingly wealthy patrons see passing on huge wealth as ruining the lives of the recipients and amoral.

Life Insurance

This is traditionally provided by big insurance companies. The concept is simple. An individual gives the insurance company a lump sum or regular payments. The insurance company aggregates all such policy contributions, invests them into a pool and pays out that particular policyholders share of that pool upon death. The policyholder does not have any control over how the money is invested or the cost of those investments and the return is often uncertain. Costs can be extremely high and are often heavily disguised. Instead, a few companies provide bespoke solutions. These segregate the contributions of the policyholder from all others and allow the policyholder or his chosen investment advisor to dictate how the money is invested. Such policies can even hold private investments such as the shares of a family company, real estate, even wine and art. Costs can be carefully controlled with most commissions minimized or eradicated. These bespoke solutions are becoming increasingly popular. Many are structured within a protected cell company or equivalent so the same insurance company can offer the same solution to multiple investors without pooling their assets. The assets can be segregated in such a way that if the insurance provider got into financial difficulties this would not necessarily impact on the investments owned by any particular policy. Bermuda offers a company incorporated by royal charter which is particularly attractive. There is generally no tax advantage when making the initial purchase of a life insurance policy but an offshore insurance company can generally invest the money tax free and often, depending on the jurisdiction in which the policyholder or his beneficiaries live, the proceeds of the policy on death of the policyholder can be received tax free.

A good example of where this structure can be particularly tax efficient is for UK residents. There is nothing to stop a UK taxpayer setting up an offshore company which can trade tax free around the world but its earnings would generally be attributed to the UK taxpayer on a current year basis. This prevents tax on the profits being delayed until paid out. In other words, non-UK companies are treated as partnerships by HMRC. However, if that company were held by the insurance policy tax would be deferred indefinitely. Simples innit?


There are many providers of pensions. They all offer a diverse range of products. In most cases the pension provider is in charge of the investment policy. Again, charges can be steep and often hidden from plain sight. Self-Invested Personal Pensions (SIPPs) are becoming increasingly popular and can cut costs. Many think they can do a good job at investing their own pension monies but it rarely works out well. However, there is no reason why an investment advisor cannot be contracted to assist.

Contributions by either the employer or employee to a properly regulated pension scheme can be made out of pre-tax income up to certain defined limits. The pension vehicle does not pay tax on investment income but distributions would generally be taxable in the hands of the recipient – again, depending on where that recipient was tax resident. There may also be tax deducted at source (WHT) depending on where the pension is based. Offshore pensions can have substantial advantage as normally there is no withholding tax. That is particularly advantageous if the recipient lives in a jurisdiction which would not tax the pension on receipt and therefore the generally available credit for the WHT is of no advantage or interest.

There are many ways to use these products to achieve tax savings in a creative and wholly legitimate way. Simple offshore structures are rarely effective these days. These regulated “products” may be the way forward.

Contact Sovereign
Get in Touch

Please contact us if you have any questions or queries and your local representative will be in touch with you as soon as possible.