The Treasury is cracking down on the use of short-term offshore bond investments which allow investors to avoid tax through commission rebate.
Details of Budget Note 35 issued after Wednesday’s Budget reveal the Treasury is shutting down the tax advantages of allowing clients to claw back commission tax-free on high value offshore bonds held for less than three years.
It is thought intermediaries had been setting up arrangements for investors which allowed them to invest more than £100,000 in premiums in an offshore bond and cash it in shortly after setting up the plan, as this created an additional return of tax-free cash because the commission rebate was treated as premium paid.
The type of plans being created as more likely to be money market fund offshore bonds, similar to bank deposits, according to advisers.
In cases where the client invested at least £100,000 and paid, for example, 5% initial commission to receive 2.5% clawback, the client would have made a tax-free gain on the additional £2,500 rebated.
Under the new rules, however, bondholders with more than £100,000 in premiums will see commission treated as 100% of premiums paid, instead of premiums less commission, if the policy is encashed or matures within three tax years of crossing the £100,000 premiums paid mark.
Bob Perkins, technical manager at Origen, says the crackdown has occurred because investors should declare the tax gain but have been failing to do so.
“I know of one or two offshore products where that [rule] is being used, principally investing in the offshore markets. In holding a [bond] product for a year, commission is rebated and the investor comes out with a significant gain so the Revenue is seeking to clamp down,” says Perkins.
“The true gain you are making is the gain you are making on the policy. So they are taxing on the real gain which includes commission rebate. But people have long held if you have commission rebate, strictly speaking you should declare it. What we tend to do is reinvest the proceeds in the policy so if you receive an enhancement to the policy it is taxed automatically within the gain made,” he adds.
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