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Offshore investment bonds vs UK investment bonds

Technical Article

Publication date:

21 August 2018

Last updated:

08 November 2018

Author(s):

Technical Connection

Offshore Bonds are often put forward as the ultimate investment for tax efficiency.  But whilst they are tax efficient, there are a number of other commercial issues to consider – not least the charges involved and the investment fund links available. 

In any comparison a careful examination also needs to be made of the respective levels of management charges for offshore and UK funds that underlie the Bond.  Further, an analysis of the extent of available underlying funds is also important as is a consideration of the strength of investor protection operating in the jurisdiction in which the overseas life assurance company is based.

 

COMPARISON

To assist in such an analysis, the table below summarises the differences and similarities between offshore and UK Bonds being effected at the time of writing (14 August 2018).  The outcome in the table below will not necessarily apply to Bonds already in force (as special rules may apply to those Bonds).

 

Offshore Bond

 

UK Bond

Taxation of the underlying investment fund

No UK tax/no local tax on the fund (usually) - gross roll-up.  Possible unreclaimable (depending on double tax treaty) withholding tax on dividends.  No local/UK fund taxation on capital gains.

Fund subject to corporation tax at 20% on income and capital gains.  No tax on UK dividend income. 

Switching between different investment funds

No tax.

No tax.

 

 

Part surrenders

5% part surrender rules apply.

 

5% part surrender rules apply.

 

Top-slicing relief (top-slicing relief is only relevant if the top-sliced gain causes the policyholder to move from basic rate to higher rate tax or from higher rate to additional rate tax).

 

 

 

 

On all chargeable events top-slice back to commencement of the Bond if non-resident relief applies – see later.  If non-resident relief does not apply the rule applies as for a UK Bond.

 

 

 

 

On part surrenders, top-slice back to date of last chargeable event (but if it is the first chargeable event then top-slice back to the commencement of the Bond).  On final encashment always top-slice back to the commencement date of the Bond.

 

If non-resident relief applies (see later) then on all chargeable events top-slice back to commencement

 

 

 

Deficiency (loss) relief in the tax year of encashment is limited to previous chargeable event gains that have arisen under the Bond if;

 

-    these previous gains arose to the same individual now being assessed to tax; and

- that individual pays higher/additional rate tax in the tax year of encashment

 

The maximum relief that can be given as a tax reduction is 20%/12½% of income that is subject to higher rate/the 32½% dividend rate tax respectively.

The maximum relief that can be given as a tax reduction is 20%/12½% of income that is subject to higher rate/the 32½% dividend rate tax respectively.

 

Taxation of chargeable event gains on encashment

 

 

(1)            Individuals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)               UK trusts other than bare trusts

 

 

 

 

 

 

 

 

 

(3)               Bare trusts

 

 

 

 

 

 

 

 

 

 

(4)               Offshore trusts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5)               Company

 

 

 

 

 

 

 

 

Taxed as highest part of investor's income. Top-slicing relief may apply to reduce any higher/additional rate tax. Possible for low income taxpayer to use income tax personal allowance, zero savings rate band and PSA. A 20% tax credit is available in respect of a Bond issued by an EEA insurer where the insurer has broadly suffered tax of at least 20% but this would be unusual.

 

Gains assessed on settlor but on trustees in tax year after that in which the settlor dies or if gains arise when settlor non- UK resident.

 

If trustees assessed the first £1,000 of gains taxed at 20%, balance at 45%.  No top-slicing relief. 

 

Gains assessed on beneficiary.  But where the beneficiary is under age 18, unmarried and not in a civil partnership, and the gain exceeds £100, the gain will be assessed to tax on the beneficiary’s parent if the parent provided the funds to purchase the Bond.

 

Gains assessed on UK resident settlor but if settlor died in a previous tax year or non-UK resident gains treated as income of the trust for later attribution to payments made to UK resident beneficiaries.

 

No 5% annual allowance.

 

 

 

 

 

 

 

Growth and withdrawals likely to be taxed on an annual basis under the loan relationship rules so no facility to defer the payment of tax.

 

 

 

 

Basic rate taxpayers have no further income tax to pay if the top-sliced gain keeps them within basic rate tax.

 

Higher/additional rate taxpayers pay income tax at 20%/25% after 20% tax credit. Top-slicing relief and PSA may apply.

 

 

 

 

 

 

Gains assessed on settlor but on trustees in tax year after that in which the settlor dies or if gains arise when settlor non- UK resident.

 

If trustees assessed the first £1,000 of gains tax free balance taxed at 25%.  No top-slicing relief. 

 

Gains assessed on beneficiary.  But where the beneficiary is under age 18, unmarried and not in a civil partnership and the gain exceeds £100, the gain will be assessed to tax on the beneficiary’s parent if the parent provided the funds to purchase the Bond.

 

Gains assessed on UK resident settlor but if settlor died in a previous tax year or non-UK resident gains treated as income of the trust for later attribution to payments made to UK resident beneficiaries.

 

 

No 5% annual allowances and no tax credit in respect of internal life fund tax for UK resident beneficiary on receipt of payments from an offshore trust which are attributed to them.

 

Growth and withdrawals likely to be taxed on an annual basis under the loan relationship rules so no facility to defer the payment of tax – 20% tax credit for internal taxation of Bond.

 

Non-resident relief for investors who are non-UK resident for some or all of their period of ownership of the Bond.

Non-resident relief (time- apportionment relief) means that no tax is payable on the fraction of gains that equates to the period of ownership whilst non-UK resident.

 

Non-resident relief (time- apportionment relief) means that no tax is payable on gains apportioned to the period of ownership whilst non-UK resident.

 

Encashment in a year in which investor is categorised as non-UK resident for tax purposes.

No UK income tax.  Could be local tax charge depending on jurisdiction.  Care where a period of temporary non-UK residence is 5 years or less.

 

No UK income tax.  Could be local tax charge depending on jurisdiction.  Care where a period of temporary non-UK residence is 5 years or less.

 

 

UK resident investors who are non-UK domiciled (deemed or otherwise)

 

·         Inheritance tax

 

 

·         Chargeable event gains

 

 

 

 

Excluded property so no IHT.

 

Normal rules apply – the remittance basis does not apply.

 

 

 

 

 

Not excluded property.

 

 

Normal rules apply.

 

Probate

May be a need for probate or equivalent in the jurisdiction of insurance company.

 

Only UK probate required.

Investor protection

Need to consider rules for the country in which the insurer is resident.  For example in the Isle of Man there is statutory protection and in Ireland protection via strict regulation.

 

Provided under the Financial Services Compensation Scheme.  The compensation amount is 100% of the claim with no upper limit.

HMRC compliance

Within limits and subject to certain conditions, insurer or tax representative may have to issue chargeable event certificates to policyholders and HMRC.

Insurer has to issue chargeable event certificate to policyholders and generally to HMRC.

 

 

Inheritance tax planning

Can form the basis of a discounted gift trust or loan trust.

Can form the basis of a discounted gift trust or loan trust.

 

       

 

The above table does not cover personal portfolio bonds which are subject to special rules.

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.