Offshore Investment Bonds
Also known as Single Premium Unit-Linked Life Assurance bonds, Offshore Investment Bonds allow you to invest in any or all of the key asset classes; cash, fixed interest instruments, commercial property, UK and overseas equities.
Investing within an Offshore Investment Bond will not create a personal liability to either Income Tax or Capital Gains Tax during the lifetime of the bond on the proviso that withdrawals do not exceed HM Revenue & Customs limits. Under current legislation, you are allowed to withdraw up to 5% of the original investment amount each year without any immediate personal tax liability. This allowance is cumulative, so if no withdrawals are taken until the fifth year then up to 25% of the original investment can be withdrawn without any immediate personal tax liability.
An Offshore investment of this type is not tax-exempt but provides for tax deferment, which in itself can be very beneficial. An income tax charge will arise only on the occurrence of a withdrawal in excess of the 5% limit, on full surrender or in the event of the death of the bond owner.
When a chargeable event does occur any gain is added to the investor’s income and taxed according to their individual personal tax position. Age related personal allowances for plan holders aged 65* or over can be reduced by on full or part surrender of an investment bond where income plus the whole of the chargeable gain exceeds £25,400 for the 2012/13 tax year. Income in excess of this figure is reduced by £2 for every £1 of taxable income. Once taxable income exceeds £30,190 for those aged between 65 & 74 and £30,510 for those aged 75 and over the Standard Single personal allowance of £8,105 less any other notification issued to the client by HMRC will apply.
Offshore bonds have certain tax advantages for UK investors.
The funds linked to offshore bonds suffer no year-on-year tax charges. This means an offshore investment bond is able to grow free of both income and capital gains tax. Small amounts of withholding tax may be payable in respect of some investments, but other than that, they grow tax-free. This is known as the gross roll-up effect. Within a UK based investment bond, management expenses may be deductible from the fund’s income for tax purposes, reducing the overall burden of tax on the fund. Where there is no tax to pay, as with an offshore fund, the effect is to reduce the benefit of gross roll-up relative to the UK based onshore version.
Additionally, offshore bonds are not subject to capital gains tax (CGT) and efficient fund switches can be carried out without any concern over creating a CGT liability.
Non UK resident offshore bond holders can also benefit from “Time Apportionment Relief” whereby any chargeable gain is discounted by the number of days spent outside the UK since the bond was purchased
*Note Age related personal allowance for the 2012/13 tax year is £10,500 for those aged between 65 and 74 and £10,660 for those aged 75 or over. These rates will be frozen from 2013/14 until such time they reach the level of the standard allowance. Anyone attaining 65 years of age after 6th April 2013 will not be able to claim age related personal allowance.