Pros and Cons of Offshore/International Bonds

16 May
Most reasons to consider offshore/international bonds include:-
  • Simplicity
  • Price
  • Access
  • Risk profile
  • Fund choice
  • Currency
  • Future aspirations and objectives
  • Tax

The actual reasons are specific to the client/investor and care is needed as there are many alternative investment structures, which maybe more beneficial and suitable.

Taxation of the offshore bond

Single premium investment bonds are taxed under the chargeable event legislation, which means gains are assessed to income tax, rather than capital gains tax (CGT).

As the bond is invested with an offshore insurer it does not suffer any income tax or CGT within the fund except for any unreclaimable withholding tax which may have been applied.

Any gains, dividends, rent or interest are taxed at 0% within the fund.

Taxation of the bondholder

For individuals any chargeable event gains will be chargeable to tax at their appropriate rate (typically, your highest marginal rate including the gain created by the encashment :- 10%, 20%, 40% or 50%.* Trustees will pay tax at 50%.

Taxpayers can use their personal allowance and their highest marginal rate of between 10% and 50% tax bands when calculating overall tax liability. For trustees, the first £1,000 worth of chargeable event gains (assuming no other income) is taxed at 20%.

For highly personalised bonds it’s important to remember that for UK resident policyholders there is a deemed charge of 15% of the premium and the cumulative gains per annum.

Advantages of the offshore bond wrapper

  • Bonds are non-income producing assets so there are no annual tax returns for individuals or trustees (also true of onshore bonds where charges are typically lower).
  • Funds can be switched within the bond without giving rise to a CGT or income tax liability on the investor and with no tax reporting requirements (also true of onshore bonds where charges are typically lower).
  • Switches in and out of funds are not subject to the CGT 30 day rule so will not give rise to a taxable event (also true of onshore bonds where charges are typically lower).
  • Income received gross within the bond wrapper will only suffer income tax on future disposal (basic rate tax is deemed and payable under an onshore bond wrapper).
  • Tax liability is reduced proportionally for time spent as non-UK resident (this excludes normal holidays and is applicable to typically time living abroad).
  • The bond can be assigned by way of gift without giving rise to an income tax charge, although there might be inheritance tax (IHT) considerations (also true of on-shore bonds where charges are typically lower).
  • 5% tax deferred allowances on each premium paid can be taken each year for 20 years without incurring an immediate tax liability (also true of on-shore bonds where charges are typically lower).
  • For the purposes of age allowance, withdrawals within the 5% tax deferred allowance are not treated as income (also true of on-shore bonds where charges are typically lower).
  • Realised chargeable gains may benefit from slice relief which can reduce or remove any higher rate liability (also true of on-shore bonds where charges are typically lower).
  • Top-ups will benefit from top-slicing from inception (individuals only) – (also true of on-shore bonds where charges are typically lower).
  • Multiple lives assured on a whole of life contract can be used at outset to avoid a chargeable event on death of the policyholder, or where there is more than one policyholder, on the death of the last of them to die (also true of on-shore bonds where charges are typically lower). Alternatively, a redemption contract where no lives assured are required can be used (typically not available with an onshore bond).
  • Can be gifted into trust and assigned out of trust without giving rise to an income tax or CGT charge (also true of on-shore bonds where charges are typically lower).
  • Single premium investment bonds are not normally included where means testing is applied by a local authority for residential care (also true of on-shore bonds where charges are typically lower) but care is needed and further advice before assuming to be true.
  • Wide investment parameters (also true of on-shore bonds where charges are typically lower).
  • Ability to appoint third-party custodians and discretionary managers (also true of some onshore bonds where charges are typically lower).

Disadvantages of the offshore bond wrapper

  • On encashment, chargeable event gains can suffer tax up to 50%*.
  • As withdrawals from a bond are assessable to income tax, it’s not possible to use personal or trustee Capital Gains Tax (CGT) allowance to reduce gains.
  • Base cost of the investment is not devalued on death for income tax purposes (chargeable event gains are assessable against original investment and any subsequent additional premium paid).
  • Death of last of the lives assured on whole of life contracts will create a chargeable event (even if bondholders are still alive).
  • Chargeable event gains reduce any available age allowance based on the total gain, not sliced gain applicable where total income exceeds £22,900.
  • May not be suitable where ‘income’ interest exists inside a trust.
  • Investment losses cannot be offset elsewhere.
  • On death of the last of the lives assured, income tax and IHT may be due.

* Finance Act 2009 increased this to 50% for trusts and for individuals with income in excess of £150,000 from April 2010.

 
This article is based on interpretation of the law and HM Revenue & Customs practice as at July 2010. I believe this interpretation is correct, but cannot guarantee it. Tax relief and tax treatment of investment funds may change in the future.

This article provides a high level summary of the potential advantages and disadvantages of offshore bonds held by a UK-resident investor (excluding companies). I cannot accept any responsibility for action taken based on this or related articles, as this is solely for information purposes and is not advice nor recommendation.

My contact details are :- tel 029 2020 1241, email welshmoneywiz@virginmedia.com, twitter welshmoneywiz, linkedin Darren Nathan

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