What are Onshore Bonds and when are they useful?
Onshore Bonds allow investors access a range of investment funds which in turn can invest into a diverse range of asset classes. They are in fact very like Offshore bonds but have a different tax treatment.
What are the differences between Onshore and Offshore bonds?
Primarily, the tax treatment, where onshore bonds are taxed at source (at a basic marginal tax rate) and offshore bonds are not.
Onshore bonds are useful in the following situations:
- The bond holder can make future fund switches without tax implications.
- The bond holder already has sufficient assets subject to the CGT regime.
- If the bondholder is a basic rate taxpayer on bond surrender, there would then be no further tax to pay on encashment, unless the gain, when added to your income, makes you a high rate taxpayer.
- Fund switches can be made with fewer tax reporting considerations than is the case with an OEIC or Unit Trust.
- The 5% tax deferred ‘income’ facility under the Bond provides a regular, simple, means of meeting your requirements.
- The 5% tax deferred ‘income’ facility may be useful for a higher rate taxpayer who expects to become a basic rate tax payer when the Bond is fully encashed.
Disadvantages of Onshore Bonds
- Onshore bonds can be less tax efficient than collective investments;
- Non-tax payers will effectively pay tax that cannot be reclaimed;
- Gains are assessed as income and thus may affect eligibility for means tested benefits and/or personal allowances