Advantages of offshore bonds
- Bonds are non-income producing assets so there are no annual tax return reporting requirements for investors.
- Funds can be switched within the bond without giving rise to a capital gains tax (CGT) or income tax liability on the bondholder and with no tax reporting requirements.
- Up to 5% per annum of the initial investment can be taken for 20 years without incurring any immediate income tax liability. The 5% withdrawal is a cumulative allowance so if no withdrawals or smaller withdrawals are taken in the early years, then higher withdrawals can be taken in later years.
- For the purposes of the £100,000 personal allowance for income tax, these 5% per annum withdrawals are not taken into account when calculating taxable income.
- Income received gross within the bond will only suffer income tax on future encashment of the bond, when a partial surrender is made, or when withdrawals in excess of 5% per annum of the initial premium are taken. When this occurs, the bond is subject to the ‘chargeable gain’ regime and is taxed to income tax. Chargeable gains may benefit from top slicing relief, which can reduce or remove any higher rate liability to take into account the number of years that the bond has been in force.
- Using multiple lives assured for a life assurance contract can avoid a chargeable event on death of the policyholder. Alternatively, a capital redemption contract where no lives assured are required can be used.
- The bond can be assigned by way of a gift without giving rise to an income tax charge. There might be inheritance tax (IHT) considerations and bonds can only be assigned to individuals aged 18 years or more.
- Bonds can be gifted into trust and assigned out of trust without giving rise to an income tax or CGT charge. Inheritance tax charges might apply.
- Access to a wide range of underlying investment options.
- Ability to appoint third-party custodians and discretionary managers on offshore bonds that have ‘open architecture’.
Disadvantages of offshore bonds
- On encashment, chargeable event gains can suffer income tax up to 45%.
- As withdrawals from a bond are assessable to income tax, it is not possible to use personal or trustee CGT allowances to reduce gains.
- Base cost of the investment is not re-valued on death for income tax purposes. On death of the last of the lives assured, income tax and IHT may be due.
- Death of last of the lives assured on life assurance contracts will create a chargeable event, even if policyholders are still alive.
- Investment losses cannot be offset elsewhere.
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This summary has been prepared based on EQ Investor’s understanding of the law and HMRC practice at September 2016. Whilst we believe the interpretation is correct it is not guaranteed and tax rules and tax treatment may change in the future.