Bermuda residents who are participants in group life insurance schemes should take care to ensure that unintended tax consequences do not arise when they die.

As a general rule, in Bermuda the proceeds of life insurance policies will not be included in your estate for stamp duty purposes. That is, provided that you have completed a beneficiary designation form, naming a beneficiary or beneficiaries (often your next of kin) to receive the benefits of your policy. If no valid beneficiary designation is in force when you die, the sum assured will be payable to your estate and may be subject to stamp duty.

However, if you are resident, domiciled or deemed domiciled in a country outside Bermuda or own assets outside Bermuda, you may wish to consider whether tax might be payable in that other jurisdiction. If, for example, you are a United Kingdom (UK) citizen living and working outside of the UK, policy benefits payable following your death may be subject to tax in the UK.

For UK inheritance tax purposes, you may be 'deemed domiciled' even if you are not domiciled in the UK That will be the case if, at the time of a transfer you were domiciled in the UK within the three years immediately before your transfer; or you were resident in the UK in at least 17 of the 20 income tax years of assessment ending with the year in which you make a transfer.

In a case that is sure to attract the attention of expatriate workers, in particular, the UK Inland Revenue this summer won a landmark decision in front of the Special Commissioners in London. Inland Revenue successfully argued that the proceeds from a term life insurance policy, issued by one of the largest life insurance companies in the United States (US), was part of a deceased's estate for tax purposes. Consequently, it was subject to inheritance tax of up to 40 per cent.

The Special Commissioners heard that the deceased person in question left the UK in 1995 to live and work in the US. His employer paid premiums into a group term life insurance scheme under which his life was insured for $380,000. The deceased was allowed to designate beneficiaries under the policy, and he could change his beneficiary designations at any time. He died in May 2001 in the US and the sum assured was paid to his two sisters, as his designated beneficiaries.

At the hearing, the sisters, as personal representatives of the deceased, argued that the policy proceeds were not part of the estate of the deceased, as the assured sum was for the benefit of the next of kin.

Inland Revenue argued that the deceased had a power to dispose of the sum assured as he thought fit and, as a consequence, under UK tax legislation, he should be treated as beneficially entitled to it. They argued that the policy proceeds formed part of the deceased's taxable estate and were therefore subject to UK inheritance tax. Inland Revenue further argued that the deceased could have assigned the policy proceeds so as to permanently remove his power of disposal, but that he had chosen not to do so.

Unfortunately, although the deceased had lived, worked and paid taxes in the US for more than seven years, he was deemed domiciled in the UK for inheritance tax purposes. As a consequence, UK inheritance tax at up to 40 per cent was payable not only on the deceased's UK property but also on his worldwide assets, including the proceeds of his term life insurance policy. The Special Commissioners determined that the deceased was beneficially entitled to the sum assured of $380,000 and so it formed part of his estate and, accordingly, was taxable.

Many people live and work in one jurisdiction with assets in, or connections with, another jurisdiction without knowledge of the tax consequences. It is always prudent to take professional advice prior to moving from one country to another. Such advice can include the tax consequences of your move, the new employment benefits that are offered and the applicable laws of the new and old jurisdictions.

In light of the above, it may be necessary for you to determine whether the language of your term life insurance policy and your nomination of beneficiary is sufficient to keep your policy proceeds out of your estate for stamp duty or overseas tax purposes.

Attorney Maxine Binns is a member of the Trust team of Appleby Spurling Hunter. Copies of Mrs. Binns' columns can be obtained on the Appleby Spurling Hunter web site at www.applebyglobal.com