The October pre-Budget proposals to lower the CGT rate from 24% (on gains on assets held for more th...
The October pre-Budget proposals to lower the CGT rate from 24% (on gains on assets held for more than 10 years) to a standard rate of 18% would have been welcome news for some UK investors. Also, the proposal to remove indexation allowance and taper relief fulfils a promise to simplify CGT that is long overdue. And, following fierce criticism from a number of business bodies, the Chancellor has reintroduced the 10% rate on the sale of business assets up to £1m.
This has to be good news for small businesses. All of these changes, if adopted, will take effect from April 2008.
Unfortunately, the proposed CGT reforms are not welcome news for everyone. Basic-rate taxpayers will be worse off as they can expect their CGT liability to increase from a potential 12% to 18%.
It is also likely that the reforms will tilt the investment choice away from UK investment bonds in favour of direct holdings in shares and authorised unit trusts. In some circumstances, if the proposals go through, the direct holdings could well be more tax-efficient.
UK investors in offshore bonds
The argument for holding equities and collective investments direct does not carry the same weight with offshore bonds - this is because of gross roll-up, investment flexibility, and the freedom to switch between investments tax-free.
There is one possible exception; this is where a higher-rate taxpayer remains a higher-rate taxpayer into retirement, and has no intention of leaving the UK. This investor might well be better off with a lower CGT rate rather than being taxed under chargeable events legislation.
However, this is only likely to apply if the direct holdings are restricted to UK low-yielding authorised investment funds, offshore low-yielding distributor funds, and switching between funds up to the annual CGT allowance.
The CGT advantage will also be lost if the investor wants to hold cash funds, hedge funds or income funds.
It is also likely that the low-yielding restriction could well have an impact on investment returns.
Many UK high earners who invest in offshore bonds will have a clear exit strategy in mind. Most offshore bond holders would expect to be either non-resident for UK tax purposes, or lower-rate UK taxpayers when encashing their bond. The table below illustrates the benefits of an offshore bond for a basic-rate taxpayer in relation to other forms of investment. It is based on the following assumptions:
- Client UK resident throughout;
- Higher-rate taxpayer during investment period;
- On encashment has full basic-rate band intact;
- Growth = 6% a year;
- Basic-rate band grows by 2.5% a year.
The first column is the net return on a UK authorised fund, the second on an offshore bond wrapper (regardless of the asset class), the third on a direct investment in an offshore roll-up fund and the fourth a direct investment in an income fund.
So with an offshore bond in this scenario, the investments grow virtually free of tax. The investor can access all the top fund managers, most on institutional terms, including hedge funds, cash funds and income funds. They also benefit from 5% tax deferred withdrawals, no tax liability on switching assets and control over the timing of any personal liability to tax.
Furthermore, offshore bonds also allow inheritance tax planning using trusts, and tax flexibility using policy segmentation.
- Pete Ashton is technical consultant at Friends Provident International.
- Aberdeen International (IOM) Life Assurance
- Axa Isle of Man Ltd
- London and Capital Life Ltd
- Canada Life International Ltd
- CMI Insurance Company Ltd
- CMI Insurance (Lux) SA
- Commercial Union International SA
- Eagle Star European Life Assurance Company Ltd
- Fortuna Life Insurance Ltd
- Friends Provident International
- Generali International Ltd
- Generali Worldwide Insurance Company Ltd
- Hansard Europe Ltd
- Hansard International
- Irish Life International
- Isle of Man Assurance
- Monarch Assurance
- Norwich Union International Ltd
- Old Mutual International Ltd
- Prudential International
- Royal Skandia Life Assurance Ltd
- Scottish Equitable International SA
- Scottish Equitable International (Dublin)
- Scottish Mutual International
- Scottish Life International Insurance Company Ltd
- Scottish Provident International Life Assurance
- Skandia Life Ireland Ltd
- St. James's Place
- Standard Life International
- Zurich Financial Services (Isle of Man) Ltd
- Zurich International Life Ltd.
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