An offshore portfolio bond has numerous potential tax benefits for a UK expats who may return to the UK at some point in the future. Some of these advantages may also apply to nationals of other countries, depending on the tax laws of the individual country in question.
Tax Efficient GrowthOffshore bonds benefit from tax efficient growth. The offshore bond is not liable to pay any capital gains or income tax on the Isle of Man or Guernsey (where most bond providers are based), so any investment gains are allowed to roll-up free of these taxes. The only tax to which funds may be liable is that which is deducted at source, eg from dividend income and certain interest. This is known as withholding tax and cannot be reclaimed. Even when the policyholder has returned to the UK, all investment gains continue to roll up free of any tax.
Offshore Bonds are ‘non-income’ producing assetsOffshore bonds are classed as ‘non-income producing assets’ by HM Revenue & Customs. This means you do not normally need to include details on your self assessment tax return until you decide to cash in more than 5% of your initial investment in any one tax year or you surrender your policy.
Time apportionment reliefAny UK capital gains tax will be reduced proportionately for time spent as a non-UK resident. Moreover, additional investments are deemed to be made at the commencement of the policy (even if they are top-ups or regular premiums made when the client is UK resident again) thereby increasing any time apportionment relief given. Time apportionment relief is a key tax benefit of an offshore bond for a UK expat who at some stage may return to the UK.
5% tax-deferred withdrawals yearlyWith an offshore bond a policyholder who is UK tax resident can make yearly withdrawals of 5% of the initial premium (and any additional premiums from the year in which they are added) without paying any income tax. This is not ‘tax free’ money, but is ‘tax deferred’, as when the offshore bond is subsequently encashed, any withdrawals are added to the surrender value of the policy to calculate any gain. This 5% is cumulative, and rolls over each year – so that a taxpayer can take 4% for 25 years or 3% for 33 years.
AssignabilityIt is possible to assign an offshore bond to another person, and the assignor will not be subject to any UK income or capital gains tax charge. Thereafter, all future UK income tax is charged at the assignee’s tax rate. Therefore the overall UK tax payable on the offshore bond can be reduced if the policy is assigned as a gift to a non-taxpayer, for example a child or grandchild of the assignor who is a university student or a non-working spouse/partner.
Transfer the Offshore Bond into a TrustIt is easy and cost effective to transfer an offshore bond into a trust. This enables a policyholder to potentially eliminate UK inheritance tax liabilities upon death. Transferring an offshore portfolio bond into trust can assist with estate planning, avoid lengthy and costly probate issues and has various asset protection advantages.
Deemed gain tax creditsUnder UK tax law there a 15% deemed gain is calculated at the end of each policy year, but is not taxable unless the policyholder is UK tax resident. This 15% deemed gain which accrues during the period of non-UK residence for tax purposes is deducted from the final surrender value, thus reducing the taxable capital gain, potentially to zero.
Top slicingWith an offshore bond it may be possible to benefit from the rules of top slicing, whereby any capital gain is divided by the number of complete years the offshore bond has been in force. If that slice, when added to the taxpayer’s other taxable income keeps them within the basic rate tax bracket, then the taxpayer will pay the 20% rate on the whole gain.
No five-year ruleSubsequent expatriation from the UK for a short period of time may avoid UK income or capital gains tax on the offshore bond. There is no need to expatriate for five years as with normal assets which are subject to capital gains tax. One complete tax year outside of the UK (for example where you have a contract to work overseas for at least one complete tax year) may be sufficient to be considered non UK resident for income tax purposes.
Invest in an offshore portfolio bond through Offshore Bond Investor and benefit from greatly reduced fees and increased allocations. For more details, please contact us.