A couple of years ago, we discussed the merits of offshore bonds in an article for International Adviser that was used as its Continued Professional Development Corner. We think it is worth repeating some of the benefits.
What are the tax advantages of Offshore Bonds?
A small amount of withholding tax on some of the income-producing investments aside, the funds benefit from gross roll-up. This should ensure greater potential growth than taxed funds by something referred to as ‘Gross Roll-Up’ . Imagine a snowball rolling down a hill and you get the idea, although having a poor investment adviser who charges on a high commission basis may have the opposite effect- Imagine the film of that snowball being reversed back to the top of the hill!
In due course there will be a time when the policyholder could be asked to pay some tax. However, tax deferral allows the policyholder to decide when to pay the tax although residency issues should be looked at on an individual basis.
If the taxpayer is living in a low tax/nil-tax jurisdiction, offshore bonds will have a considerable advantage over other products.
There can only be an income tax liability when a ‘chargeable event’ occurs in the following circumstances:
- When the sole or last life assured on the policy dies;
- When the bond is surrendered or a segment of the bond is surrendered;
- If the policy is assigned for money or money’s worth;
- If more than the cumulative 5% of total premiums paid allowance is withdrawn in any given policy year.
Offshore Bonds-Time-apportionment relief
When a policyholder has had tax residence outside the UK, a chargeable event gain can be reduced to reflect this period of non-UK residence. This is known as time-apportionment/non-resident relief. The gain is apportioned using the formula A÷B, where A is the number of foreign days in the material interest period and B is the total number of days in that period. It is important advisers look at the definition of foreign days and material interest carefully. (For definitions, see HMRC’s Insurance policyholder taxation manual.)
Summary- Offshore Bonds
There are some excellent tax planning advantages with the effective use of offshore bonds, but there are pitfalls .
Charges and high commissions within offshore bonds (strong), often accompanied by high Total Expense Ratios also may have the result of little taxation in the end. However, this would be entirely due to their being little no profit to tax- something we see regularly in the offshore finance market.
Ensure your adviser is properly regulated, suitable experienced and works on a clear and transparent basis. If you want a review of your investments, try our Forensics Report .
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
This article was republished on 21st April 2020
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