Offshore bonds are beneficial for investors who have more than £250,000 to invest or are considered ...
Offshore bonds are beneficial for investors who have more than £250,000 to invest or are considered a non-domicile or non-resident for UK tax purposes.
According to Bob Golding, international planning manager at Clerical Medical, offshore bonds can outperform onshore on long-term investments of £250,000 or more, due to the compounding effect of gross roll up. However, he said it was necessary for clients to have a bond for at least 20 years to benefit from this.
For example, if a client invested £250,000 in an offshore bond and the same amount was put into an onshore bond, the offshore product would outperform the UK-domiciled bond after 20 years, if an 8% growth rate was assumed. After 30 years the offshore product would have grown to £1,100,000 compared to the onshore product with £1,000,000.
This takes into account both taxes and charges for the bonds. The onshore bond has been taxed 20% within the fund, while the offshore bond has had a 40% charge applied to the gains. However, Golding stressed that high-income earners could be taxed a further 20% on gains in an onshore bond.
As charges are also generally higher on offshore bonds, the final net return on smaller investments for shorter time scales does not make it worthwhile as the compounding effect of gross roll up does not have time to take effect, Golding explained.
However, he argued offshore bonds were beneficial for non-domiciles, non-UK residents and those absent for more than 182 days in one tax year.
He said gains on an offshore life policy could be reduced directly in proportion to the time the policyholder spent as a non-UK resident. For a non-domicile or a person not born in the UK, an offshore bond would be considered outside the scope of UK inheritance tax. According to Golding, there are around 60,000 non-domiciles in the UK, with this number steadily rising.
Offshore bonds also provide investors with a greater fund choice compared to onshore bonds, Golding pointed out. He explained: "Permissible funds can include hedge funds as well as offshore deposit accounts. Also, if a client wanted to use discretionary management services this would also be allowed."
The advantages of an onshore bond, Golding explained, included capital gains tax indexation and lower management charges which can be deducted from a fund's income for tax purposes.
Taxpayers who are on a low income when encashing the bond pay no further tax liability, while higher rate tax payers pay 36% once the initial 20% tax has been taken from within the fund. This compares to 40% tax on an offshore bond (see diagram above).
Offshore bonds outperform onshore for investments other than £250,000 held for more than 20 years
Onshore bonds outperform offshore for smaller sums and shorter time scales
Offshore bonds beneficial for a non-resident and a non-domicile
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