Guide to Offshore Bonds
Offshore bonds and NON-UK resident taxpayers
Tax changes announced in October 2007 have radically changed the tax planning landscape for non-domiciled UK tax residents, when it comes to investing in offshore bonds.
‘Non doms’ can still qualify for immunity from UK taxes on their offshore income and gains, provided they pay their subscription fee of £30,000 pa to the UK taxman.
But what about individuals for whom £30,000 is not justifiable relative to their offshore income? For people with only one source of funds from which they need to make remittances to the UK, one option is to use an offshore bond provided by a non UK resident insurance company.
These investments are deemed to be ‘non income producing assets’ and have their own unique tax treatment, which allows investors to withdraw up to 5 per cent of their original capital investment annually, with the tax deferred until such time as the investor chooses to encash the bond.
Another tax advantage is the ability to assign an investment bond to another person for tax purposes, without triggering tax charges. The other advantage is gross roll up of the fund.
This means that an offshore bond may suit someone who lives in the UK but is non-UK domiciled for tax purposes. They can invest in an offshore bond, and use the annual 5 per cent tax deferred withdrawal facility to remit income to the UK for living expenses.
For instance, if you were a non dom with £1m in an offshore investment bond, you could remit £50,000 (5 per cent of your £1m capital investment) to the UK each year without triggering any tax on the growth within the bond.
At some time in the future, you could either leave the UK or assign the bond to another person who is not taxable in the UK and they could crystallise the gain, free of UK taxes.
Offshore bonds can also be used by those who have already accumulated offshore income and gains which are mixed with their offshore capital.
Under the new (and old) rules, remittances from these mixed funds would trigger a charge to UK tax. Going forward, unless the £30,000 annual ‘non dom’ tax charge is paid, any future income will be taxed on an arising basis.
In this case, and assuming that no income will be sent to the UK from this mixed fund, it can be reinvested in an offshore bond.
Income and gains within the bond will not be taxable going forward and the £30,000 tax charge can be avoided. Furthermore, withdrawals of up to 5 per cent of the original investment can be made and provided this is not remitted to the UK, it can be used to fund overseas expenses.
Offshore bonds and UK resident taxpayers
The arguments in favour of offshore bonds for ordinary UK residents, who are liable to standard UK income tax, are somewhat less clear cut.
Since the introduction of capital gains tax at a flat rate of 18 per cent, effective since 6 April 2008, makes investment in collective investments such as mutual funds and Oeics generally more attractive to UK resident taxpayers. This is because gains on collective investment funds are now taxed at 18 per cent CGT, after one’s £9,600 CGT exemption has been mopped up. Income from collective investment funds is taxed at 32.5 per cent.
Gains from investment bonds, by contrast, are taxed as income at 20 or 40 per cent, according to one’s marginal rate of tax.
However, everyone’s tax and financial circumstances are different, so it is advisable to seek advice from an independent financial adviser.