Anthony Rothwell highlights key reasons why offshore bonds have a place in retirement planning.
Reason 1 – Offshore bonds offer a tax efficient wrapper for a wide range of collective investment funds and cash. By deferring virtually all taxes, the investor can choose when he or she pays the tax and may be able to elect to defer the happening of a chargeable event until a more favourable time. As offshore bonds are non-income producing assets, there is nothing for investors to report on their self assessment form until a chargeable event occurs.
Although the death benefit is usually minimal, a life policy needs at least one life assured (who can be separate to the policyholder). As there is no insurable interest in the Isle of Man, multiple lives assured can be selected for added flexibility. A chargeable event would occur on the death of the last life assured, surrender or maturity of the bond, assignment for money or money’s worth or a withdrawal that exceeds the 5% allowance.
Reason 2 – Offshore bonds can offer access to an extensive range of funds, often with preferential charges from the fund managers due to the volumes of business placed by the life company. As well as the company’s own range of funds, funds are typically available from both onshore and offshore fund managers. An investor may wish to delegate the choosing of investments within their bond to their duly authorised investment adviser. Clients’ existing funds or portfolios may be transferred into a bond, however, this is a disposal for capital gains tax purposes.
Reason 3 – Unlike dealing in directly held funds, fund switches within a bond do not trigger a charge. So, for example, at times when the investor is unsure of the market, investments can be switched into cash until it is deemed the right time to switch back into the market. Alternatively, funds can be switched as and when opportunities arise.
Reason 4 – Withdrawals of up to 5% of the premium(s) paid can be taken each policy year without triggering an immediate tax liability. The 5% allowance is cumulative so any unused amounts will be carried forward into later. After 100% of the premium has been withdrawn (such as 5% per year taken for 20 years) then any further withdrawals will usually be taxable. Withdrawals make no allowance for the actual value of the bond so any withdrawal in excess of the cumulative 5% allowance would be subject to tax. As 5% withdrawals are classed as return of capital, they are not included as income when determining personal or age allowances.
Reason 5 – If an amount greater than the 5% allowance is required, it is possible to surrender individual policy segments. Bonds are usually issued with many identical policy segments. On surrender, there is a charge to income tax on what is referred to as the chargeable gain.
Withdrawals in excess of the allowance could be beneficial for someone with unused personal allowance.
Reason 6 – Top slicing relief applies when the addition of the chargeable gain to the investor’s taxable income takes the income into higher rate or additional rate tax bands. The gain is divided by the number of full years the bond has been in force to produce an average yearly gain, (called the ‘slice’). If when added to taxable income, part of the slice takes an investor into the higher or additional rate tax band, there will be additional tax to pay on that part of the gain only.
Reason 7 – It may be that the investor will retire abroad. If a chargeable event happens when an individual is resident in another country there is no liability to UK income tax (local tax advice needs to be sought in the new jurisdiction).
There is also a relief for non UK residents who subsequently move to the UK. This will reduce any chargeable gain to reflect the period of non residence.
Reason 8 – Non-domiciled individuals resident in the UK can benefit from an offshore bond. Instead of paying the additional tax charge of £30,000 in order to be taxed on a remittance basis, withdrawals within the 5% allowance are not classed as income or capital gains so are not subject to tax until a chargeable event occurs. Care needs to be taken so that the premium paid into the bond does not include previously un-remitted income or gains.
Reason 9 – Offshore life companies also offer a range of ‘off the shelf’ trusts and packaged products to mitigate UK inheritance tax.
Reason 10 – Companies that offer offshore bonds are mostly subsidiaries of major UK, European or North American financial services groups. They are based in first class jurisdictions like the Isle of Man, the Channel Islands, Luxembourg and the Republic of Ireland. All offshore life companies are authorised by their home state regulators which have extensive authorisation requirements. Offshore life companies maintain their policyholders’ assets separate from their own finances by keeping them held on a ‘ring fenced’ basis.
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