Offshore Bonds

Offshore Bonds may be useful for people looking to grow money in a tax efficient way.

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The value of investments and the income they produce can fall as well as rise, you may get back less than you invested.

Tax treatment varies according to individual circumstances and is subject to change.

There are many guides to offshore investment bonds on the internet, as a result, I will simply provide a brief overview of what this useful product does and how it might be beneficial:

An offshore bond is a useful tax planning tool. However, unless you are planning to move abroad, then their main utility is the ability to defer paying tax on income or proceeds of the bond to a time or circumstance where you pay a lower rate of tax.

The bond will benefit from growing in a tax-free environment (offshore) and the policyholder can withdraw up to 5% of the bonds value per year  (up to a total of 100% of the original investment) without incurring an immediate tax liability. This allowance rolls up so if you don’t use all of it in one year it rolls on into the next year, e.g. if you made no withdrawals in the first 4 years, you could take 25% of the original investment in the 5th year without an immediate tax liability This is particularly useful for higher rate taxpayers who are looking for a tax efficient income source.

Essentially, if funds withdrawn are within the 5% per annum limit, then tax is only due on encashment of the bond, or :

If the accumulated withdrawals are total more than 100% of the original value of the investment.

The bond can be set-up based on multiple lives, for example, let’s assume that the ‘lives assured’ are the settlors (the couple who set-up the policy) and the settlor’s children. This means that when the settlors die the bond continues to exist as the children are still alive and they effectively become the policyholders so there is no tax liability due until the children die, surrender the bond, or make withdrawals that exceed the limits described above.

The benefit of this is that the original settlor’s (parents) can avoid paying tax on the income they take from the bond – subject to the above allowances/limits.

The offshore bond can be divided into segments and these segments can be assigned to the children or grandchildren. Please remember that children are not exempt from tax and if they exceed the limits above they may have to pay tax if any ‘chargeable gain’ exceeds their personal allowance.

Some of the benefits of offshore bonds are as follows:

  • Low maintenance product which provides an efficient tax environment for growth;
  • Can provide a tax efficient income;
  • A tax efficient way to pass on money to grown up children at university;
  • A low cost to set-up and run;
  • The investment is likely to be diversified and can be risk managed and it is liquid, i.e. you can take your money out without penalty at any time;
  • Offshore bonds should be seriously considered as an alternative to investing in property, especially if you are concerned the hassle of dealing with difficult tenants as well as the risk of holding a potentially illiquid asset.

Some of the disadvantages of offshore bonds are as follows:

  • On encashment, chargeable event gains can suffer income tax up to 45%.
  • As withdrawals from a bond are assessable to income tax, it’s not possible to use personal or trustee CGT allowance to reduce gains.
  • Base cost of the investment is not re-valued on death for income tax purposes (chargeable event gains are assessable against original investment and any subsequent additional premium paid).
  • Death of last of the lives assured on life assurance contracts will create a chargeable event (even if policyholders are still alive).
  • Chargeable event gains reduce any available age allowance based on the total gain, not sliced gain.
  • May not be suitable where ‘income’ interest exists inside a trust.
  • Investment losses cannot be offset elsewhere.
  • On death of the last of the lives assured, income tax and IHT may be due, depending on whether a trust / s have been used and what type of trusts.
A COffshore Bonds