The main tax benefit of investing in an offshore bond is gross roll-up.
Gross roll-up means that any underlying investment gains are not subject to tax at source – apart from an element of withholding tax.
With an onshore bond, life fund tax is payable on income or gains made by the underlying investment. This means your offshore investment has the potential to grow faster than one in a taxed fund.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
Tax planning benefits
- Deferring tax if you’re a taxpayer
As with an onshore bond, you can benefit from tax deferral – an income tax charge will not arise until the bond is partly or wholly cashed in or more than the 5% tax-deferred is taken out.
If the bond is partly or wholly cashed in or more than the 5% allowance has been taken out, any UK personal tax may be minimised if:
– You wait until you become a non-taxpayer before doing this, or
– You move abroad and become non-UK resident for tax purposes before doing this.
Note that corporate investors do not enjoy the same 5% deferred tax allowance.
- Non taxpayers
As a non-taxpayer you can take money out of your bond and any investment gains within your personal allowance will be free of tax.
If you are in a couple and one partner is a non-taxpayer it can be tax-efficient to have an offshore bond in their name or to assign it to them. An assignment to a spouse or civil partner is normally exempt from inheritance tax.
* Please note if you ask us to pay Ongoing Adviser Charges from your bond, these will be treated in the same way as regular withdrawals. In terms of income tax, they will count towards the annual 5% tax-deferred allowance for UK resident policyholders.
- Time apportionment relief
Under time apportionment relief, the chargeable gain on an offshore bond will be reduced in proportion to any time you’ve been resident outside the UK. For example, if you’re a non-UK resident for half the time the bond is held, the gain would be reduced by half.
- Top slicing relief
This can potentially reduce the income tax liability if you move into a higher tax bracket as a result of a chargeable gain.
Inheritance tax planning
- Assigning a bond in a trust
If a bond has been set up in a discretionary trust and the trust is to be wound up, after the tax year of the settlor’s death, it may be more tax-efficient for the trustees to assign the bond to the beneficiary, rather than cashing it in and paying out the proceeds.
If the bond is assigned, the tax will fall on the beneficiary, which will save tax if they are anything other than an additional rate taxpayer. If the bond were cashed in within the trust, it would incur tax at the trustee rate, which is currently 45%.
INHERITANCE TAX PLANNING, WILL WRITING, TAXATION & TRUSTS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
- Capital redemption basis
This means there will be no life assured, so the bond can be continued (for up to 99 years) until the most convenient time to cash it in – possibly across generations. This can be very attractive for trustees.