Offshore Investments

OFFSHORE INVESTMENT BONDS

An offshore investment bond is a wrapper set up by a life insurance company and domiciled in a jurisdiction with a favourable tax regime such as Isle of Man, Ireland, Luxembourg or Guernsey.

Offshore investment bonds can be used as an investment vehicle to control when you pay tax, how much you pay and whom you pay it to.

Within an offshore investment bond, investments benefit from growth that is largely free of tax – referred to as gross roll-up.

Unless the money from the offshore bond, either as capital or income, is brought to the UK, it is not subject to UK taxes.

Investors must therefore be aware of the tax regime in which they are resident when they encash the bond or take income from it.

Structure of an investment bond

Offshore bonds are tax wrappers, within which you can invest in a wide range of assets such as equities, mutual funds, ETF’s, fixed interest securities and cash deposits.

An offshore bond applies the legal and tax advantages of a life assurance policy to an investment portfolio, which can bring some useful tax advantages to the investor.

Taxation of an investment bond

An offshore investment bond is a wrapper set up by a life insurance company and domiciled in a jurisdiction with a favourable tax regime such as Isle of Man, Ireland, Luxembourg or Guernsey.

Offshore investment bonds can be used as an investment vehicle to control when you pay tax, how much you pay and whom you pay it to.

Within an offshore investment bond, investments benefit from growth that is largely free of tax – referred to as gross roll-up.

Unless the money from the offshore bond, either as capital or income, is brought to the UK, it is not subject to UK taxes.

Investors must therefore be aware of the tax regime in which they are resident when they encash the bond or take income from it.

UK taxation of the bondholder

For individuals any chargeable event gains will be chargeable to income tax at their highest rate (20%, 40% or 45%). Taxpayers can make use of their personal allowance when calculating their overall tax liability.

However you can reduce this tax liability by making use of the 5% annual tax deferred entitlement for single premium bonds. This allows you to take up to 5% per annum without an immediate tax charge.

If you do not use the 5% allowance (or part thereof) in any given year it is not lost. The allowance simply rolls over and is carried forward.

For example if you took 3% in year one then 2% would be carried forward. In year two you could then take 7% (2% from year one and 5% from year two) without a tax charge.

You can roll the 5% allowance forward for as long as you like.

This allowance of 5% is only available for 20 years, thereafter it becomes taxable.

As with any investment if you do not need immediate ‘income’ for a few years this would greater benefit your portfolio by allowing it to grow more.

Transferring existing assets into an offshore investment bond to save CGT.

If you currently own shares, unit trusts etc. that if sold would trigger a capital gains tax liability (CGT) you can transfer them into an offshore bond and save paying any future CGT.

This is achieved by way of an in specie transfer. Here your assets are not sold but simply transferred into your offshore bond without creating a tax point on transfer.

Once your assets are inside the offshore bond you can sell them at any time and invest the proceeds in other assets without any liability to CGT.

Reasons to use an offshore bond

  • Offshore bonds can be used as a tax efficient platform or wrapper where you can manage your investments.
  • Tax reporting simplified. Offshore bonds are not deemed to be ‘income producing assets’ which negates the need for individuals or trustees to complete self-assessment tax returns.
  • Gross roll up – investments within the bond can be switched (sold) without the requirement for any tax reporting and without rise to CGT.
  • Income produced by investments within the bond is received gross, and will only suffer income tax on future encashment of the bond.
  • Existing assets, equities, mutual funds etc., can in most cases be transferred into the bond and gain from all the advantages of an offshore bond.
  • Time apportionment relief – income tax liability is reduced proportionately for the time spent as non-UK resident. For example if you have been resident outside of the UK for half of the term your bond has been held, the taxable gain would correspondingly be reduced by half.
  • 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.
  • 5% of the original premium can be withdrawn from the bond for 20 years cumulatively without being subject to tax, being treated as return of capital.
  • Offshore bonds can be partially or wholly assigned to another family member or individual, unlike ISAs or pensions.
  • Offshore bonds can be placed in trust – and taken out of trust – without rise to an income tax charge or CGT.

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