Independent Financial Advisors - IFA Bolton, UK

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Offshore Bonds

Offshore Bonds are similar to UK onshore bonds and are generally issued by subsidiaries of well-known UK life offices in countries such as the Isle of Man and Ireland, with the main differences being the tax treatment of the monies.

Offshore bonds generally offer a wider range of investments, which can be useful for seeking highly specialised funds, and can also be useful in mitigating Inheritance Tax liabilities.

Some territories apply favourable tax treatment for overseas investors, with the country concerned generally imposing little or no tax on the income and gains of the underlying life fund, thus allowing what is often called a gross roll-up.

This means that additional growth can be gained on the untaxed income, which is compounded until final encashment. In contrast UK onshore bond life funds currently suffer tax at 20%.

However, for UK income tax purposes, when the bond is ultimately realised for cash, or where withdrawals in excess of the 5% allowance are taken, UK policyholders are liable to UK income tax. For example, with a UK based investment bond, higher rate taxpayers are liable to a 20% tax charge on the net return or excess withdrawal, whereas with an offshore fund the charge is 40% of the gross return or excess withdrawal.

The tax treatment stated may differ depending on the status of the offshore bond fund chosen.

Some investment income received by an offshore fund may be received after deduction of non-reclaimable withholding tax, thus reducing the effect of gross roll-up. In addition, there would be no credit for this in the chargeable gain, leading to possible double taxation.

Within a UK Investment Bond, management expenses may be deductible from the fund’s income for tax purposes. An offshore fund has no tax from which to deduct management expenses and so deducts them from income generated, thus reducing the effect of gross roll-up.

The taxation of the investment can be briefly summarised as follows:-

The proceeds of the bond are payable free of any liability to Capital Gains Tax, however a charge to Income Tax can arise :-

- on total encashment of the bond
- on assignment of the bond for money or money’s worth
- if partial encashments in any year exceed 5% of the amount invested
- if the cumulative total of partial encashments exceeds 100% of the amount invested
- on the payment of death benefits.

If one of these chargeable events occur whilst you are alive (and resident in the UK for Income Tax purposes), any gain or excess is deemed to form part of your income for the tax year in which the chargeable event occurs. The liability to income tax will be at your highest rate.
 
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