As you know, an "offshore bond" is an investment wrapper set up by a life insurance company in a jurisdiction with a favourable tax regime, such as the Isle of Man or Dublin.
This means that investors benefit from growth that is largely free of tax – often referred to as "gross roll-up".
Consider this: if you invested £1 and doubled it up every year, what would it be worth in 20 years' time if no tax was deducted each year? You may be surprised to hear it would be worth £1,048,576!
However, if that same investment suffered 20% tax each year (equivalent to basic rate tax), it would be worth just £127,482! And if it suffered 40% tax each year (equivalent to higher rate tax), it would only be worth £12,089!
So the first thing an offshore bond offers is tax-efficient planning. And remember 'gains' from offshore bonds are treated as 'savings income'.
Therefore, non-taxpayers can offset their personal allowance (£10,500 for 2015/16) and then the 'starting rate for savings' which is the next £5,000 for 2015/16. In addition, the starting rate drops from 10% to 0% in 2015/16 (and that's not a typo - it is zero). That means up to £15,500 of gains without any personal liability to tax!
A client can take up to 5% of the original investment annually where tax is deferred until the bond is ultimately encashed. So someone with £300,000 to invest could take an annual withdrawal of £15,000 for 20 years without having to pay any income tax on this at the time of withdrawal.
As the bond is split into a number of 'segments', the client has the option to fully encash segments rather than taking a withdrawal across the whole policy depending on which route is best for that client.
Top-slicing relief can be used where the total gain takes the client into the higher rate or additional rate tax brackets. This allows the gain to be proportioned over the number of complete years the bond has been in force.
With offshore bonds, top-slicing is always back to inception, irrespective of whether there have been previous chargeable events.
Time apportionment relief can be used where the client has been non-UK resident for a period of time whilst holding the offshore bond. This allows the gain to be proportioned between the days spent as a UK resident and non-UK resident, again reducing the ultimate tax payable.
An offshore bond offers simple administration. There is no income tax reporting requirement until there is a chargeable event – and normal chargeable event rules apply.
Funding options – with open architecture and access to platforms and Discretionary Fund Managers (DFM), you can invest in virtually any collective fund – so there will be something to suit any client's risk profile and preferences.
For clients who like to switch funds, there is no liability to capital gains tax (CGT) every time a switch is made - but the downside to that is a client cannot utilise their CGT annual exemption to reduce gains on offshore bonds.
There are many other uses for offshore bonds apart from a straightforward investment. They make ideal investments for inheritance tax planning and trusts plus there are various structures available depending on the client objectives.
They can be useful for clients who may move abroad or retire abroad as they can be portable. For any client who wishes to fund for school fees/university costs, an offshore bond is a very flexible wrapper.
How many clients are currently non-UK domiciled with money to invest and perhaps looking to protect this from IHT if they were to become deemed UK domiciled? An excluded property trust may be appropriate and can hold offshore bonds.
To summarise, an offshore bond offers tax efficiency, access, control and flexibility. What more could you want?
Cathy Russell, tax and estate planning consultant, Canada Life Limited
01707 422999, [email protected]