Why you should still invest Offshore

If you hold an offshore investment bond it is very likely that you would have received a letter in recent months about the need to declare previously undeclared income with Her Majesty’s Revenue & Customs. The aim of this letter is to scare individuals into declaring all of their offshore income, whether it is from offshore investments or from offshore property. In this piece I want to take you through the benefits of investing offshore through an investment bond.

The main ways that we recommend individuals to invest offshore is through an investment bond. An investment bond is a product that allows regular withdrawals of up to 5% of the original amount invested each policy year without triggering any immediate tax liability. If the allowance for any one policy year is not used it can be carried forward to another year. The key thing to remember is that the tax charge is only deferred as when the bond is encashed withdrawals will be taken into account in the chargeable surrender calculation and taxed as income in that tax year.

The main benefit of an offshore bond over an onshore bond is the fact that it does not pay tax within it (or very little). In contrast an onshore bond is deemed to have paid 20% within it (even if the effective rate is much lower which it typically is). This means that an offshore bond benefits from the compounding effect on income and gains rolling up gross which can make a big difference to the overall return.

On the surrender of an offshore bond a higher or additional rate taxpayer pays tax at the higher (40%) or additional rate (45%) on any chargeable gain. A basic rate tax payer pays 20% on any chargeable gain and when the gains fall below the basic rate threshold for tax 10% is applied. Top-slicing relief will be available to a basic rate taxpayer who becomes a higher rate tax payer on receipt of the bond proceeds, or higher rate tax payers pushed into the additional rate band. Top-slicing is a process where the gain is divided by the number of full years held to determine whether a reduced tax bill is possible. This reduced gain is added to taxable income in the year of surrender, which may avoid higher rate (40%) and additional rate (45%) income tax on very large taxable gains.

The benefit of deferring tax on offshore bonds is particularly attractive for those that know that if at the time that they want the benefits they will be on a low income. If you consider that the personal income allowance is now £11,500, £500 savings allowance and there is an additional £5,000 for the personal savings allowance that is potentially £17,000 of income that can be taken by surrendering part or all of a bond without paying any income tax.

For example if John Smith received no other income apart from his state pension of £6,359.60 per annum and a small pension of £1640.40 this would give a total annual income of £8,000. It would allow him to receive gains from a bond of £9,000 before having to pay tax. If we assume Mr Smith had originally invested £50,000 into an offshore bond 5 years ago and the policy was now valued at £80,000 this would give him a gain of £30,000. If Mr Smith decides to surrender the policy this gain is then top sliced over 5 years (£30,000 divided by 5) it gives him an average gain of £6,000. When this gain is added to his other income it gives him a total assumed income of just £14,000 so there would be no tax to be paid. As the policy was held off shore no tax would have been paid within the plan or on surrender making it very tax efficient.

Points to note are that the calculations for the tax on the surrender of bonds with larger gains can become more complicated as some of the personal allowances are either reduced or completely removed. Also the fact that offshore bonds are typically more expensive means that they should only be chosen in the right situation.

For any further financial planning recommendations please feel free to visit www.bradburyhamilton.co.uk or call Sheriar Bradbury on 020 7220 7274.