Wrap up savings offshore
by Beckie Williams, private banker
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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 which 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.
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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 can 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 can 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. For example, a UK resident is entitled
to withdraw up to 5% of their original investment each year, for up
to 20 years, without any immediate liability to income tax. If they
choose not to take this allowance in any year, it can be
accumulated. So in effect, 5% not taken over 5 years would mean
they could then encash up to 25% of their initial investment
without any immediate income tax liability. This can be an
extremely tax efficient means of taking an 'income' from a
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 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.