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Offshore Bonds

Fiduciary Wealth Team

AN INVESTMENT OPPORTUNITY NOT TO BE MISSED?

HIGHER RATE TAXPAYER? LOOKING TO MITIGATE YOUR IHT LIABILITY? UK NON DOMICILED? EXPATRIATE? LIVING IN SPAIN?

Offshore Bonds have always had a part to play in investment and tax planning whether for high net worth individuals, non domiciled UK residents or those potentially leaving the UK either on a temporary or permanent basis. Following the latest Government announce- ments, the new 50% tax regime and the restrictions on relief for pension contributions, Bonds are now even being considered as a possible alternative for retirement planning.

What is an offshore bond anyway? Quite simply an investment that offers gross roll up of investment returns in funds that pay little or no tax, with the widest investment choice and with the benefit of tax deferment on withdrawals and can be used with a number of different types of trust arrangements.

So why should I invest in a bond? Tax Deferred
First of all 5% of the original capital can be drawn each year without any tax liability. This benefit is cumulative i.e. if 10 years have elapsed 50% of the original capital will be available without an immediate tax liability. A chargeable event only occurs when withdrawals exceed the 5% cumulative allowance or the bond is finally encashed.

Strategic Assignment and Timing 
Bonds or segments of bonds can be assigned to an individual who pays tax at a lower rate than the assignor without giving rise to a chargeable event. Any future chargeable event will now be assessed on the new owner at their prevailing rate of tax.

For example a grandfather purchased a bond 10 years ago. His grandson has just started university with all the associated costs. The grandfather assigns segments equal to the value of the grandson’s personal allowance each year. On encashment the grandson will not be liable for any tax. The bond has had the advan- tage of many years gross roll up and funds can be withdrawn over time with little or no tax paid.

Similarly a bond holder can choose to trigger a chargeable event at the most advantageous time. For example, having retired and holding funds within a SIPP drawdown pension account, you could choose not to take any taxable income from your pension but encash segments of a bond that would keep you within the basic tax rate bracket. The timing of withdrawals is totally under your control.

Exploitation of residency and domicile rules
For investors who anticipate being non UK residents during the period of ownership of an offshore bond, time apportionment relief will be available. The effect of this relief is to reduce any chargeable gain by an amount equal to the time of non-UK residence. Any client encashing bonds whilst non UK resident will not be subject to UK income tax on any gains.

For example Mr Smart invests £100,000 in an offshore bond. Three years later he moves to Gibraltar. As a non UK resident he takes a £95,000 withdrawal, £15,000 is within the 5% deferral allowance and £80,000 is a chargeable gain. As the client is non UK resident for income tax no UK tax will be payable. During this period of non residence the bond receives a top up premium of £95,000. Mr Smart returns to the UK and eventually encashes the bond for £180,000. The charge- able event position is as follows (A+B) - (C+D) where A is the surrender value, B is the sum of all withdrawals, C is all the premiums paid and D is the withdrawals which were previously chargeable gains i.e subject to UK tax.

Thus the chargeable event calculation is (195,000+ 80,000) - (195,000+80,000) =£0 chargeable gain.
Mr Smart has effectively made a gain of £80,000 that will not be subject to UK tax.

Non Domiciles
For UK non domiciles the challenge is to min- imise tax liabilities whilst providing an accessible investment with flexibility. The solution is for a client to transfer funds into an offshore bond which gains the benefit of tax deferral, having elected not to be taxed on the remittance basis that year thus avoiding the £30,000 remittance charge. The client will then still retain his / her personal allowances. There is no tax payable on the bond which can be fully encashed if the client later moves abroad (there may be a tax liability in the country where the bond is encashed) and if the client decides to stay in the UK the bond can be placed in a trust which protects the asset from UK inheritance tax but allows full access, assuming the client remains non domiciled and has been in the UK for less than 17 out of the last 20 tax years. Care should be taken to ensure that funding comes from clean capital. This is a great alternative to investing in an onshore bank account which would be deemed liable for UK income tax at source with higher rate liability via the annual self assessment. The Bond has a benefit of 5% tax deferral allowance which enables withdrawals to be made without immediate tax liability.

Spanish Residents 
Spanish residents have their own unique version of an offshore bond with only the growth element of the bond being subject to tax when a full or partial withdrawal is made. The proportionate gain is assessed to tax at either 19% (on first 6,000 Euros of gain) or at a max- imum of 21% for amounts exceeding 6,000 Euros of gain. In practice on small withdrawals the effective rate of tax may be as low as 1 or 2%. Tax on withdrawals is automatically paid by the supplier direct to the Spanish Hacienda so this then is a product above the radar for expatriates living in Spain and is tax compliant.

Whatever your circumstances it is likely that an offshore bond can play a part in your financial plans. Couple this with our investment capability to choose and manage best in class funds on your behalf and you begin to see the real benefits of allowing us the opportunity to help plan and build your financial assets.