Wrap up your savings offshore
August 2008
Offshore investing has often been viewed as a
means for the very wealthy to shelter their money from tax. It is
true that there can be tax benefits to investing offshore but these
are strictly dependent on an individual’s personal
circumstances.
One of the most popular forms of offshore
investment is an offshore bond. Essentially, this is a wrapper in
which you can hold a variety of investment funds such as unit
trusts and open-ended investment companies (OEICs), as well as
cash. They are particularly useful for higher rate tax payers who
are planning to retire or move abroad to a lower tax regime, as
growth achieved within the bond rolls up free of tax and no tax is
payable until the bond is finally cashed.
As part of the Old Mutual group, we have
recently agreed bespoke terms with sister company Royal Skandia to
offer cost efficient and flexible investment opportunities in an
offshore bond structure. Under the agreement, the bond, and its
underlying assets, can be held within our Focus integrated banking and investment
platform. It can be denominated in sterling, euro or dollars.
Who is an offshore investment bond
most suitable for?
- UK domiciled, UK residents seeking to
supplement their income by making tax efficient withdrawals
- UK domiciled, UK residents seeking capital
growth and the ability to defer taxation
- Internationally mobile UK nationals
- Foreign nationals living outside their own
country
- Individuals seeking estate-planning
opportunities
- UK based, non-domiciled individuals who
have been in the UK longer than seven years and who are not
claiming a non-domiciled status.
The offshore bond works as a flexible, lump
sum investment, which allows you to take advantage of a wide range
of investment opportunities while offering the convenience of
holding all your funds in one portfolio. It is designed to achieve
capital growth or income over the medium to long term and can also
offer a number of tax efficiencies.
What are the benefits of an offshore
bond?
- Gains are not taxable until they are
encashed
- Encashments and therefore income tax
liabilities can be deferred until convenient to the investor
- Gains are taxable under income tax
schedules
- Taxable gains can be reduced through time
apportionment and/or top slicing
- If you are a UK resident, partial
withdrawals can be made up to 5% per annum of the initial amount
invested and are free of immediate taxation. The tax is deferred
until final encashment, or for 20 years, whichever is sooner
- Switching between funds within the wrapper
does not trigger any capital gains tax or income tax
liability.
A collective redemption bond allows you to
hold an extensive range of approved and authorised collective
investment funds, including unit trusts, investment trusts,
open-ended investment companies (OEICS), SICAVs and mutual funds,
as well as cash. This diversification enables you to spread
the risk and boost potential returns. Any changes to the
investments held within the bond can be made with no liability to
capital gains or income tax. There is also the option of unlimited
switching between fund managers and funds.
One of the most flexible features of the
bond is the withdrawal facility. If you are a UK resident, you are
entitled to withdraw up to 5% of your original investment each
year, for up to 20 years, without any immediate liability to income
tax. If you choose not to take this allowance in any year, it can
be accumulated. So in effect, 5% not taken over 5 years would mean
you could then encash up to 25% of your initial investment without
any immediate income tax liability. This can be an extremely
tax efficient means of taking an ‘income’ from your bond.
The offshore bond can also offer the means
for individuals with surplus assets to assign or gift them to a
third person, without giving rise to an income tax charge. This can
be a particularly effective way to help out your children or other
individuals who are lower rate or non-taxpayers. For example, a
bond could be taken out on behalf of a child and then assigned to
them when they go off to university.
Royal Skandia, the bond provider, assumes
responsibility for the administration of the bond, while Fairbairn
Private Bank can manage the underlying investment portfolio on a
discretionary basis. Finally, the special charging structure
we have negotiated with Royal Skandia means that investors can
withdraw their funds free of any charges or penalties at any
time.
Please note:
The price of, value of, or income from your
investments can fall as well as rise and you may not get back the
original amount invested.
The value of tax benefits is subject to
change and dependent on individual circumstances.
The offshore bond is not available in
certain countries, eg, USA and South Africa.