Offshore
Bonds

An offshore bond is a tax efficient wrapper that can hold a variety of assets, like stocks and shares or mutual funds. One reasons bonds are issued offshore is because this adds the legal and tax shield of a life insurance policy to an investment portfolio. The offshore investment bond can be structured to combine a life insurance policy and a portfolio to create a wrapper that investors can buy, manage and sell their assets through.

Your personal tax status will determine whether your investments are taxable, and at what rate.

In very general terms, offshore bonds can offer regular withdrawals that give investors access to capital in a tax-efficient way by enabling the withdrawal of up to five percent of each investment amount every year as tax-deferred income.  This five percent can be taken every year for 20 years, or built up over a number of years and withdrawn less frequently, without triggering a chargeable event for tax purposes.

If you have or are considering an offshore investment bond, you should understand the following:

The structure of an investment bond

One of the most common questions our financial planners are asked is "why use an offshore bond?"

Here are 10 key features of an offshore investment bond:

1. Offshore bonds can be used as a tax efficient platform or wrap where you can manage your investments.
2. They can offer an offshore bank account together with your own chequebook, credit card and internet banking facilities.
3. Under certain circumstances they can make tax reporting more straightforward. Offshore bonds are not deemed to be ‘income producing assets’ - which negates the need for individuals or trustees to complete self-assessment tax returns.
4. Gross roll up – investments within the bond can be switched without the requirement for any tax reporting and without rise to CGT.
5. Income produced by investments within the bond is received gross, and will only suffer income tax on future encashment of the bond.
6. Time apportionment relief - income tax liability is reduced proportionally for time spent as non-UK resident. For example, if you have been resident outside of the UK for half the term your bond has been held, the taxable gain would correspondingly be reduced by half.
7. The bond can be assigned by way of gift without giving rise to an income tax charge, although there might be inheritance tax (IHT) considerations.
8. 5% of the original premium can be withdrawn from the bond for 20 years cumulatively without being subject to tax, being treated as a return of capital.
9. Bonds can be partially of wholly assigned (to another family member or individual), unlike ISAs or pensions.
10. Bonds can be placed in trust - and taken out of a trust - without rise to an income tax charge or CGT.

Here is a practical example of how top slicing works for those with offshore investment bonds who are or become UK residents for tax purposes. Say you have £30,000 of income over your personal allowance, which is taxable in this tax year, and you’ve made a gain of £15,000 from your offshore bond, which you’ve held for three complete policy years...

Personal Portfolio Bonds (PPBs) are life insurance or capital redemption polices that allow the policy holder to choose assets beyond those described in PPB legislation. Generally, holding structured products, individual equities or bonds, or unauthorised investment trusts within your offshore bond will mean it’s a PPB.

If your bond is classed as a PPB, when you’re a UK resident you will pay tax on a 15% annual deemed gain, based on your original premium and cumulative deemed gains, whether your bond increases in value or not. This deemed gain will be taxed at the policy owners highest marginal rate of income tax each year. You may be eligible for time apportionment relief, but not top-slicing relief.

For example:

David, a UK resident, took out a plan with a single premium of £500,000. He then surrenders the plan in year 6, for £530,000.

If the plan did not hold any problematic assets and was never classed as highly personalised, the gain to be assessed for income tax would be £30,000 (£530,000 - £500,000).

However, if David’s plan held offending assets and was considered therefore highly personalised, he would have been assessed for UK income tax each year on the deemed gain basis. As a result, the tax charge would be approximately £131,175 by the end of plan year 5.

It's worth noting that no deemed gain is applied in the plan year that the plan is fully surrendered.

If David had lived in another country when he opened the plan, and moved to the UK in year 4, and did not sell the offending assets he held by the end of year 4, his plan would become a PPB at the end of the plan year. As such, David would be issued with a Chargeable Event Certificate for deemed gain of £114,066. If the offending assets were sold before the plan anniversary, there would be no deemed gains as the plan would not be highly personalised.

• Tax deferred withdrawals of up to 5% per annum over 20 years.
  
  
• Dividend and other income may be subject to withholding tax which is non-recoverable.
  
  
• Income and realised gains in the funds are not taxed locally or may suffer a low rate of tax.
  
  
• On surrender, a higher or additional rate taxpayer pays tax at the higher or additional rate on any chargeable gain.
  
  
• A basic rate taxpayer pays 20% on any chargeable gain and a starter rate taxpayer 10%.
  
  
• Top-slicing relief will be available to basic rate taxpayers who become higher rate taxpayers on receipt of the bond proceeds, or higher rate tax payers pushed in to the additional rate band.

All providers and all bonds have different charging structures, and it is an unfortunate feature of the most popular offshore investment bonds that their fees and charges are indecipherable.

We have a dedicated offshore bond section on our site where we review the product providers and their bonds, and where we outline typical costs, which can include: -