Industry stresses to investors that discussion is not an investigation
UK investors in offshore bonds are facing the possibility of an 15% annual tax charge in the wake of Government talks about the suitability of certain asset types for such vehicles.
The lack of clarity in the legislation means it is possible the Inland Revenue could choose to treat offshore bonds containing certain types of non-UK funds as personalised assets, turning a tax-efficient offshore bond into a tax-penalised personalised portfolio bond.
However, there is no immediate risk to investors, according to the Association of Life Offices (Ailo). The trade body claimed that, unlike previous aggressive moves by the UK Government against offshore investments, this issue is part of an ongoing discussion between the Government and industry, the intention of which is to get legal clarification with the minimum of investor disturbance. The Revenue said they were "unable to comment at present" on the issue.
The problem arose because of the complexity of the huge body of law that is relevant to offshore tax treatment. The most likely investments to have caused problems in the bonds are closed-ended property funds and structured products. International Investment understands that more than 50 funds available on offshore bond platforms could be under scrutiny.
A personalised portfolio bond is subject to an annual 15% deemed profit tax regardless of the performance of the underlying investments. However, with an ordinary portfolio bond there is no tax to pay each year. It is taxed only an encashment.
Brendan Harper of Ailo, said: "It is possible that because the legislation is ambiguous, a policyholder may have put a non-permitted asset into an offshore bond unknowingly. However, these assets are not personal to the policyholder, nor is the investment strategy controlled by the policyholder.
"It is still early days to know if investors will be faced with a 15% taxable gain if such an asset is discovered in an offshore bond. We hope because the legislation is unclear it will not."
Paul Kennedy, taxation and trust manager at Prudential, warns there is a danger that although a product may be called the same structure in another jurisdiction, it does not necessarily mean it is acceptable. Particular care needs to be exercised with new generation investments such as hedge funds and structured products.
He told International Investment the Portfolio Bond legislation and guidelines laid down by the Revenue interplay with lots of other pieces of regulation and this can cause a re-interpretation of the original law.
Kennedy said: "The interaction of all this legislation can cause problems for the unwary. The personal portfolio bond regulations were introduced around five or six years ago, but since then many new regulations have been introduced such as the Financial Services and Marketing Act.
"There are also more types of investments than before and different types of underlying structures available. You need to be very careful to follow the full circle of the legislation because the older legislation is not always what it might seem on first glance."
Another example is an Oeic these can only be included in an offshore bond if it meets some definitions of a UK Oeic. An investor would only be allowed to invest in a Cayman Island Oeic provided it meets some of these UK definitions.
• Discussions between the UK Inland Revenue and the offshore life industry are continuing regarding what counts as a personalised portfolio bond.
• The asset types that are under the most scrutiny are some strains of non-UK fund vehicles, in particular certain types of closed-ended property funds and structured products.
• The worst-case scenario is that investors could be faced with a 15% deemed profit tax if they are found to have a personal asset in their offshore portfolio bond.
Annuity market worth £4bn in 2017
Oversees £30bn of advised and D2C assets
£1bn business since inception
Considered doing so in 2015
Client communication considerations