As we enter the summer season many of us are thinking of taking a well-earned break and perhaps one overseas.  As financial planners we look to an overseas solution for valuable tax breaks when the onshore solutions have been maximised. Much discussion is had in the financial press of the undoubted tax benefits of better-known structures such as SIPPs (Self Invested Personal Pension) and ISAs (Individual Savings Accounts), but not so much offshore bonds. These structures are closer to home than they first sound being typically based in Jersey, the Isle of Man or Dublin rather than more exotic locations as the name may suggest.

Offshore bonds can provide significant tax benefits and although they sound somewhat opaque, they are fully accepted by HMRC (HM Revenue & Customs).

So, what are the benefits of an offshore bond:

Gross role up

Liability to tax on the income and gains within an offshore bond can be deferred. This is known as ‘gross roll up’ or ‘tax deferral’.

Tax efficient withdrawal 

Each policy year for 20 years, a policyholder can withdraw (with no immediate UK income tax charge):

• Up to 5% of their initial premium, plus
• Up to 5% of any additional premiums (from the policy year in which the policyholder invested the additional premiums).

Unused 5% tax deferred allowances can be rolled forwards.

Gift assignment 

Policyholders can choose to gift the bond by assigning ownership to a third party, meaning:

• No UK income or capital gains tax charge is payable by the policyholder (the original investor) at assignment
• Future UK income tax is charged at the new owner’s tax rate (if any).

Top slicing relief 

Whenever the policyholder decides to surrender their bond, the growth of their investment may mean that the policyholder becomes either a higher rate or additional rate taxpayer. Top-slicing relief may assist in reducing the rate of tax charged by comparing the full gain to what would have been charged if the gain had instead been spread over a number of policy years

Trusts 

Placing an offshore bond in trust can:

• Reduce or eliminate a settlor’s/donor’s UK inheritance tax liability
• Assist with generation planning
• Remove the need for probate.

Offshore bonds are powerful tax planning vehicles particularly for those who have maximised other allowances such as pension or ISAs, business owners looking to reinvest the proceeds of a sale for long term tax efficient income and those looking for a very flexible solution to inheritance tax.

We believe there are significant benefits in accessing financial planning and offshore bonds are one structure in the tool kit that may help you to…

Enjoy the journey!