Tax wrappers can be expensive if the benefits are not justifiable for the individual concerned.
Investment bonds often are loaded with high establishment charges and high discontinuance penalties.
Unscrupulous “advisers” (read brokers) may recommend underlying investments that pay them a trail commission, and therefore have high total expense ratios.
This can significantly harm investment returns.
The main charges to be mindful of are establishment charges, administration charges, dealing charges, fund manager charges, and exit charges.
Be clear on each of these.
Offshore bonds can provide an investor with the ability to defer and plan taxation.
As financial planners, we use these wrappers to assist clients with their (often) fairly complex tax planning needs.
Being able to hold assets offshore and pay no tax on the capital increases or income distributions until a point in time specified by the client, to fit around other controllable sources of income, is a very valuable tool.
Many expatriates prefer to invest in offshore funds via offshore bonds rather than onshore unit trusts, because when profits are taken from the offshore investment bond, they are taxed as income at whatever tax rate applies to the investor in the country they are residing in.
This can allow the investor to defer tax, to time the surrender of an offshore investment bond, and to control what tax they pay and when they pay it.
However, there are limited benefits to setting up these policies whilst resident in a low/no tax environment such as the UAE.
Offshore investment bonds offer potential tax advantages if you spend time residing outside the UK.
This is because you can claim tax relief on gains made while you reside offshore.
This is called ‘time apportionment relief’ (see above) and you can reduce the tax paid by the proportion of time you were resident outside the UK.
Conversely, time spent residing overseas reduces the number of years used when calculating “top slicing” relief.
When used in finance, the term ‘offshore’ simply refers to a country other than the one in which you’re living. Therefore, if you bank offshore you hold an account in another country, and if you invest offshore you’re just accessing investment products in another country…or investing in another country’s assets.
Investing offshore therefore, in its simplest form, is simply investing in a country other than the one in which you live. Just as offshore banking is holding an account in a country other than the one in which you live.
There are many reasons to consider investing offshore in funds or bonds or even real estate – one of the most common reasons is to gain exposure to opportunities not available in your home country.
International professionals like you, also known as expats, often invest offshore because you’re exposed to a wealth of new investing opportunities when you move overseas (pun intended.)
Whether you choose to maintain what’s called a home country bias – where you retain and bank and invest your wealth in the country you live in – or you choose to think more internationally, and perhaps go offshore, is a personal decision.
In this article we focus on a particular type of offshore investment, namely bonds. We explore the pros and cons of these products, discuss who they are potentially advantageous for, and highlight the main risks that we feel very strongly are not highlighted sufficiently well to potential investors like you.
One important point to cover is whether tax free investing offshore is only for the rich (or dodgy!).
The financial concept of offshore has gained a certain amount of notoriety thanks to media focus on complex tax avoidance strategies employed by all and sundry, as exposed in the likes of the Panama Papers.
Investing or banking offshore is not illegal. It is also not the exclusive right of rich and infamous. If you’re an expatriate for example, i.e., someone living, working or retired in a country other than your original home country, there can be countless benefits to saving, investing and banking offshore.
Depending on where you live, the tax rules you’re exposed to and the financial solutions and structures you choose, you too may be able to enjoy some of your wealth tax-free by going offshore, or perhaps defer the payment of tax – which is a particular feature of an offshore investment bond.
An offshore investment bond is a financial product. It is an investment wrapper used by investors who may want control over when they pay tax, how much they pay and where they pay it.