by John Westwood [email protected]
John Westwood is the Managing Director of Blacktower Financial Management Group.
Offshore bonds have been hugely successful, particularly in the UK where they are often chosen because of their flexible tax planning benefits.
But for investors outside of the UK, including UK expatriates, they still have an important role to play when it comes to investing lump sums.
Firstly, there may still be some tax benefits for UK expatriates who have not been able to remove themselves from UK taxes, or for those who may return to the UK in the future.
For UK residents, gains on an offshore bond are subject to income tax. Therefore you only need to spend one complete tax year outside of the UK (assuming it is for a settled purpose i.e. employment) to avoid this tax, whereas many assets are subject to capital gains tax and would require a five year period to avoid gains being taxed.
However, even if you are no longer deemed a UK tax resident you may still be caught by the definition of ‘ordinarily resident’.
For those investors who may return to the UK the income tax would be reduced proportionately for time spent as a non-resident. Furthermore any top ups made are deemed to be made at the initial investment date even if made when a UK resident again.
It should also be remembered that any gain is divided by the number of years the policy has been in place – this reduced figure is then added to taxable income in the year of surrender and may, on very large taxable gains, avoid higher rate (40 per cent) or additional rate (50 per cent) UK Income Tax.
There are additional tax planning angles (deemed gains and five per cent tax deferred withdrawals). Instead, this article will cover the additional benefits of offshore bonds which will benefit not only UK expatriates but almost all investors.
Let’s start with the obvious one of ‘gross roll up’. Investments within the bond grow virtually free of income tax and capital gains tax, although there may be tax to pay when the funds are taken.
The ability to manage the timing of when money is withdrawn is a further benefit as in most countries the gains are not taxed until realised. This capability to defer any tax liability and manage the timing can be particularly attractive but will depend upon individual circumstances.
Linked to that is the advantage of being able to buy and sell different assets without creating any immediate tax liability.
What’s more is the ease with which an investor can move between assets within an offshore bond. All deals are co-ordinated by the Life Office rather than having to approach different fund managers and there is also the benefit of one consistent dealing form.
This can be a particularly attractive way to access a wide range of assets, including, possibly, funds which may not normally be available to individual investors.
If this investment choice is too much then the investor has the option of using the expertise of their Adviser or a third party specialist to guide them and manage an appropriate risk adjusted portfolio.
With the Life Office placing multiple deals on behalf of investors it allows them to negotiate reduced initial charges with the fund managers – the benefit of which is usually passed on to the investor.
They are also able to ensure that the fund managers provide high service standards.
Perhaps one of the biggest benefits for investors is the convenience of being able to amalgamate a variety of investments into one product.
This may save costs but will most certainly save time and effort. An offshore bond provides consolidated reporting without the individual paperwork, dividend receipts and tax returns usually associated with holding a portfolio of investments.
With on-line client access investors will also be able to view their investment portfolio in one place rather than across multiple sites.
With all investments being held in one clearly identifiable product it offers the ability to place the offshore bond into a trust. Assuming trusts are recognised in the client’s country of residence this could be useful as part of a generation planning exercise.
It may also be helpful if the investor has a complicated family situation, wanting to simplify probate or is self-employed and looking for some form of asset protection.
Most international Life Offices have a range of trusts available to suit common situations and may be complemented by a professional trustee service which is often heavily subsidised.
There are many benefits of offshore bonds over and above the usual taxation advantages and should appeal to a wide range of investors looking to invest a lump sum for the medium to long term.
This facility is not suitable for all expatriates, and we recommend that advice is sought before one makes any commitment.
As an Independent Financial Adviser, Blacktower seeks to ensure that our clients receive the advice suitable for their specific circumstances.
Blacktower Financial Management Group – Telephone 289 355 685.
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