Using a Lloyd’s vehicle to pass down wealth

The market started in Edward Lloyd’s coffee shop in the City of London in the late 1600s, where ship owners and captains would gather to exchange news and information. Edward Lloyd saw an opportunity to profit from this by renting out his tables to entrepreneurial businessmen willing to sell insurance to the ship owners. In exchange for an upfront payment or premium, these businessmen would indemnify the ship owners if their ship or cargo was lost at sea.

This setup worked well for both parties. If voyages went well, the businessmen made money while the ship owners could sleep a bit easier, knowing they wouldn’t lose everything if a vessel didn’t return.

Today, Lloyd’s is the world’s leading insurance and reinsurance marketplace, and it remains true to its roots. It’s still a place where buyers of insurance and reinsurance come to agree terms with underwriters.

Limited Liability Vehicles

After a series of well-publicised problems in the early 1990s, the authorities at Lloyd’s brought in a series of changes to update and professionalise the market. They opened the door to corporate capital providers, meaning companies could back syndicates rather than just wealthy investors and, for the first time, you could underwrite with limited liability by introducing Limited Liability Vehicles (LLVs) - now the only route available for private investors to build exposure to the market.

To access this unique market, private investors can either buy or start an LLV. These are designed specifically for trading at Lloyd’s. They limit the liability of the ultimate owner, so only those assets used to support the underwriting within the LLV are at risk if the market suffers significant underwriting losses.

There are two types of LLV. Investors can choose between a UK limited company structure (Nameco), or an English Limited Liability Partnership (LLP). In both cases, the vehicle used will be deemed to be carrying on a trade for tax purposes – underwriting at Lloyd’s - and will offer the investors limited liability, restricting any potential losses to assets held within or pledged to the vehicle.

Both strategies have their own merits. The right vehicle for an investor will depend on their personal tax situation and overall aims. Of course, those considering Lloyd’s investment should seek their own independent tax and legal advice. However, one of the key benefits of using either method is that an underwriting business at Lloyd’s will qualify for business relief under the current inheritance tax (IHT) regime (for UK taxpayers). Both LLPs and Namecos can have multiple partners or shareholders and additional ones can be added at any time. This makes an investment in the Lloyd’s market a particularly appealing strategy for passing wealth down through generations.

LLPs are fiscally transparent, so profits pass through directly to the partners. Profits are taxed at the owners’ marginal rates of 20%, 40% or 45%. Unlike a Nameco, profits are generally deemed to be earned income and therefore are pensionable.

The cost of establishing both structures to underwrite at Lloyd’s is relatively similar. Members’ agents - the wealth managers for the Lloyd’s market and regulated by the Financial Conduct Authority (FCA) who deal with the portfolio management and the compliance. The three members’ agents, of which Hampden Agencies are the largest, help investors establish their exposure to the market and help keep all the private capital providers to the market informed and up to date with Lloyd’s developments. They’re also charged with managing the capital requirements of private investors and producing research on the market.

The capital used to support an investor’s underwriting activity is known as Funds at Lloyd’s (FAL). Although there’s no longer a minimum amount of FAL required by Lloyd’s, an investor should be looking to deploy at least £500,000 which can be held in the form of cash, equities or a bank guarantee.

Namecos will have shareholders, and the number of shares any party owns can vary, but importantly Nameco shareholders have the flexibility over when they can declare dividend payments. There’s no commitment to distribute capital every year and shareholders may decide to build up reserves within the Nameco. From a tax perspective, this can make a Nameco particularly attractive.

Another benefit of using the Nameco structure is that investors can fund the company by way of a loan. If investors choose this approach, the corporate vehicle can return profits by repaying the loan rather than distributing income as dividends. There’s no tax due on loan repayments, while dividends are taxable.

Considerations for investors

A vehicle trading at Lloyd’s can be a useful way to pass down wealth while profiting from the potentially lucrative and counter-cyclical insurance market, can attract business relief and can, therefore, be exempt from IHT. Between 2003 and 2022 (2022 being the latest underwriting year we have official closed year figures for), Hampden’s managed discretionary portfolios, have produced a net, pre-tax annualised return for investors of 24.2%*. Add this to potential IHT savings and the attraction of this market is clear to see.

There will be, however, some considerations for investors including how the FAL is provided and the amount of surplus FAL, as only assets required for underwriting will be considered for business relief. Powers of attorney can also be considered as a part of the family investment planning process. This is a complex area and a members’ agent, like Hampden, can help with examples and explanations but as mentioned before, independent tax advice should also be sought.

Whichever course an investor chooses, it’s vital to have an up-to-date will detailing their wishes for a smooth transition. In short, though, a vehicle at Lloyd’s can provide a family a great way to pass assets from one generation to the next whilst offering the opportunity to enhance and maximise profits through the double use of assets.

For more information, contact:

Thomas Ward
Private Client Director
Hampden Agencies
[email protected]

Read the latest edition of Private Affairs for updates in private wealth law.