There are still opportunities for some UK corporate clients to use capital redemption bonds to defer...
There are still opportunities for some UK corporate clients to use capital redemption bonds to defer tax, according to offshore insurers. This follows a change in the way these bonds have been taxed since 10 February by bringing them within the loan arrangements provisions.
The decision to change the way capital redemption bonds are taxed in the UK came after the Inland Revenue discovered a scheme whereby these bonds were being used to generate artificial capital gains tax (CGT) losses for CGT purposes.
Brendan Harper, technical services manager at Friends Provident International, said the loan arrangements provisions seek to tax companies on the profit and loss made as they accrue rather than as they are paid (see technical notebook on page 26). The rules stop corporate clients from being able to withdraw 5% a year in income and defer the tax on this until the bond is cashed in.
But Harper and Colin Jelley, senior manager of market development at Skandia, have stated that, according to guidance from the Revenue, it is still possible to defer tax until the surrender of the bond for some corporate clients. Whether companies can defer tax depends on the way they account for financial investments, says Jelley. If corporate clients use fair value, in which they record the market price each year, a company cannot take advantage of tax deferral.
But if a trading company uses amortised costs then they can still use capital redemption bonds for tax deferral. This is because no profit flows from the financial investments into the profit and loss accounts.
Offshore capital redemption bonds are attractive to companies because they do not have any lives assured. By not having any lives assured, if a director retires, leaves the company or dies, the bond does not trigger a chargeable event. A capital redemption bond has a term of up to 99 years.
A company can take advantage of tax deferral to time its withdrawals from a bond to coincide with years when it has low profits or even suffers a loss. These withdrawals can also be made when corporation tax rates are reduced.
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From 6 April 2019