New to offshore?
This section of the website gives you a bit more information on the benefits of investing offshore and how the tax aspects work. The specific benefits of an offshore bond depend upon your client's individual circumstances. But there are lots of generic benefits for UK residents which tend to apply in most situations:
Virtually tax-free growth
The investment funds held within offshore bonds grow virtually free of year-on-year life company taxation, unlike onshore bonds which are taxed yearly on any income and capital growth. Some income received by the offshore life company may suffer irrecoverable withholding tax, and neither the life company nor the planholder will be able to reclaim or get credit for this tax.
No capital gains tax
Your client won't be liable to capital gains tax on fund switches made within offshore bonds. But if the same switches were made within a portfolio of direct equity or unit trust investments your client may be liable for capital gains tax for the tax year during which they made the switches. So offshore bonds can be more tax-efficient for active investment fund management.
Access to their money
Offshore bonds let your client have access to some or all of their capital if they need to. Though as offshore bonds are long-term investments there may be charges if they withdraw money in the early years.
Your client can take regular withdrawals from offshore bonds, accessing their capital in a tax-efficient way by withdrawing up to 5% of the investment amount every year for up to 20 years as tax-deferred 'income'. The 5% amount can be accumulated over a number of years and withdrawn less frequently without triggering a chargeable event.
A chargeable event which would be taxable may occur if your client was to withdraw more than the 5% a year, or if the bond was cashed-in in full.
Tax control
Tax deferral is an important feature of offshore bonds. This lets your client choose when they may be charged tax, as this will only arise when a chargeable event gain occurs. The tax payable at the point of a chargeable event will depend on their highest rate of tax at that time.
This allows them to put off such an event until they're either no longer a taxpayer or have moved from being a higher rate taxpayer to a starting or lower rate taxpayer or have moved to a country with a lower tax rate. You should bear in mind that if your client does move to a different jurisdiction the benefit of tax deferral may be lost.
Inheritance tax planning
By holding your client's offshore bond under trust this can mitigate, or avoid altogether, inheritance tax as well as other taxes. On death, if your client has assets which aren't held under trust above the nil rate band (the threshold above which inheritance tax applies) they may be liable to inheritance tax at 40%. As well as potentially removing the value of the bond from your client's estate, it may be possible to allow your client some access to the bond held under trust.
Self-assessment friendly
As offshore bonds are 'non-income-producing assets' there's nothing for your client to report to the Revenue until a chargeable event gain arises. They don't have to include any information on their tax return before this point, compared with the potentially complicated requirements for reporting income and gains on a portfolio of direct equity or unit trust investments. When they do need to include information on their tax return under self-assessment, it's also generally much simpler to report.
Non-UK status
As offshore bonds aren't UK-based investments, this can help your client mitigate any UK tax depending on their personal circumstances. A fundamental benefit of an offshore bond is that it provides a 'tax wrapper' around their investment choices, with potentially more favourable tax treatment than an onshore equivalent.
Please remember that benefits aren't guaranteed and that the value of investments may go down as well as up.
