Life settlement funds have long enjoyed a home in Ireland. Greg Winterton caught up with Ailish Finnerty, Partner at law firm Arthur Cox, to learn more about why, and whether the trend will persist.
GW: Ailish, let’s start with the obvious. Why do so many life settlement funds call Ireland home?
AF: US life settlement portfolios represent a very attractive investment to US and non-US investors alike. In bringing investors together, a key focus of the asset manager will be to ensure the fund is located in a favourable jurisdiction that has a long established and well-respected legal regime in the investment fund area. In addition, the fund itself must be tax efficient, ideally with no withholding tax on payment of maturities from the US insurer to the fund, no material tax leakage at the level of the fund itself and no withholding taxes on payments of returns to the US and non-US investors.
Ireland is an obvious choice here. The Irish ICAV and Irish Section 110 company are long established and present a tried and tested solution to all the issues highlighted above.
GW: Your expertise is in corporate tax planning. Is there anything on your radar from a regulatory perspective that is coming up that might impact the life settlement market?
AF: We advise only on Irish legal and tax issues in establishing and maintaining Irish vehicles to hold life settlement portfolios. As such, we cannot comment on any regulatory issues in other jurisdictions (e.g. the US, where the policies are sourced). From an Irish perspective, changes of law in the tax arena are of relevance and, if the portfolio is held via an Irish ICAV (which is a vehicle regulated by the Central Bank of Ireland (“CBI”), any changes in the regulatory regime applicable to ICAVs are of interest also. The Section 110 company is mainly outside the regulatory framework of the CBI and therefore is less likely to be impacted by regulatory change.
In the tax space, the BEPS initiative (introduced in the EU via the Anti-Tax Avoidance Directives) introduced, among other things, anti-hybrid rules and interest limitation rules that impacted the tax treatment of Section 110 companies. In some cases, those tax changes mean that the structure is better housed in an ICAV (which is exempt from tax in Ireland in these circumstances) and we helped our clients migrate across from a Section 110 company to an ICAV in those cases.
From the perspective of the CBI, there was a period around 2020/2021 when life settlement funds were attracting more scrutiny in the approval process, as the CBI sought to understand the asset class and why they were seeing so much interest in Ireland for these structures. We worked with our clients to assist the CBI in answering questions raised and ultimately to get them comfortable and in the past couple of years, the CBI is back to its usual process of granting approval within 24 hours. Although fund regulation in Europe is a constantly developing area, we don’t see anything on the horizon that would fundamentally change the way life settlement structures are regulated in Ireland.
GW: In mid-July 2022, the Central Bank of Ireland changed its pre-submission process for a Qualifying Investor AIF, which, for the life settlement industry, meant that applications could be fast-tracked. Almost two years on, has this had much of an impact on fund launches?
AF: Yes, the removal of the pre-submission process for life settlements and the return to the normal QIAIF filing process and timelines has certainly allowed institutional managers to launch their strategies in a very timely manner and has facilitated managers in more accurately timing the launch of their funds with the closure of portfolio acquisitions.
GW: There has been anecdotal evidence to suggest that more life settlement asset managers are launching closed-ended funds, as opposed to open-ended ones. What are some of the tax implications that a manager and/or an investor should be conscious of here?
AF: Happily, being either closed-ended or open-ended does not impact the Irish tax treatment of the vehicle although it is noted that from a liquidity management perspective most managers find that closed ended structures are more suitable to this type of less liquid asset. Being closed-ended doesn’t prevent distributions to shareholders on maturities but does protect the structure from liquidity pressures.
GW: A cynic would say that tax is the main driver of investment fund returns, not the strategy employed by the investment manager. What’s your message to end investors that are considering allocating to life settlement funds in terms of the impact of tax?
AF: Make sure you are getting the right advice! Ensuring the life settlement portfolio is housed in a well-structured Irish vehicle that benefits from the Ireland/US tax treaty, you should be able to avoid any tax leakage in getting maturities out of the US, in the vehicle itself and in getting returns to investors. Clearly, local law advice where the investor is located will be critical also to optimise the status of the returns earned.
Ailish Finnerty is a Partner at Arthur Cox LLP.