The essence of good financial planning is to match a client"s financial needs with the investment ve...
The essence of good financial planning is to match a client"s financial needs with the investment vehicles available. There are many types of investment vehicle available to the UK investor. Diversity is good - clients" needs differ and different shapes of product can meet differing client needs.
How can an offshore bond help advisers meet a client"s needs? Most clients need flexibility and tax efficiency as key attributes of any investment vehicle. The prospect of positive investment returns is also attractive.
The flexibility of offshore bonds is well known. They can be written on a multi-life basis (in the Isle of Man, for example, insurable interest is not an issue); the portfolio bond concept allows linkage to a very wide range of funds.
The tax advantages of an offshore bond can be grouped into two categories, internal and external.
The internal advantages relate to the absence of a tax charge on the underlying funds and the ability to change investment strategy (switch). Bonds issued by providers in most 'offshore" jurisdictions suffer little or no tax within the underlying policy funds - the 'gross roll-up" effect. Within a bond, switches are not disposals for capital gains tax purposes, an advantage denied to other investment vehicles.
The external advantages relate to tax position of the owner. From the client"s viewpoint the chargeable event regime offers a considerable advantage. The client pays tax when they receive value from the bond, as opposed to annually, as would be the case with a direct investment in equities, deposit accounts or unit trusts/Oeics. Why pay tax 'as you go" when you can pay tax at the end of the investment period?
A bonus is the ability to take 5% of the premium each policy year without triggering an immediate tax charge. Although the amounts taken from the bond under this rule are taken into account when calculating the tax liability on a subsequent chargeable event, tax deferred is nearly as good as tax saved.
A welcome side-effect of the taxation regime applying to bonds is that the owners do not have to include details of the bond in their self-assessment returns unless and until a chargeable event occurs.
Top-slicing relief offers one of the few opportunities for 'income averaging" within the UK tax system. The ability to average the profit on the bond, back to commencement, is a welcome advantage for those bond owners thrust into higher-rate tax by a chargeable event.
Time apportionment relief is a feature unique to offshore investment bonds. No other investment offers the owner relief from tax for periods spent outside the UK.
Bonds can be transferred without triggering a chargeable event. This makes bonds particularly attractive in inheritance tax planning strategies. Wealth can be passed to succeeding generations, either directly or through the medium of a trust, without a capital gains tax charge.
While bonds cannot offer a solution in every scenario, they will often form part of the solution offered by sophisticated advisers.
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