You too… can contribute to the growth of the offshore economy 

Ross Mills Senior Associate and Investment Specialist at Holborn Assets.

FIGURE THIS; An extraordinary amount of £13 trillion is sitting in offshore accounts, according to a newly released report commissioned by the campaign group Tax Justice Network.

The detailed analysis in the report compiled using data from a range of sources, including the Bank of International Settlements and the International Monetary Fund, shows that individuals particularly in the oil-rich states of the GCC are generous drivers of this offshore economy. Ross Mills explores the benefits of investing offshore…

Virtual tax-free growth
Often referred to as the gross roll up effect, investment in an offshore bond grows virtually free of year-on-year Income Tax and Capital Gains Tax charges, unlike comparable onshore bonds which suffer tax on any growth. Small amounts of irrevocable with-holding tax may be payable on certain investment funds.

No Capital Gains Tax
Fund switches made within offshore bonds do not trigger a Capital Gains Tax liability. Such switches within a portfolio of onshore direct equity or unit trust investments would incur a Capital Gains Tax charge in that tax year during which the switches were made. Offshore bonds therefore provide a more tax efficient structure for active investment management.

Access to your money
Offshore bonds enable you to have access to some or all of your investment monies should you need to. As offshore bonds are long term investments there may be some penalties which apply if you withdraw your money in the early years.

You can take regular withdrawals from most offshore bonds, accessing your capital in a tax efficient way by withdrawing up to 5% of total premiums paid every year as income. This 5% amount can be taken every year for 20 years, or accumulated over a number of years and withdrawn less frequently without triggering a chargeable event for tax purposes (a chargeable event occurs when you withdraw in excess of 5% per policy year or you cash in your bond in full, in triggering a potential Income Tax charge).

Tax control
Tax deferment is a key feature of offshore bonds. This enables you to choose when a tax charge may occur, as this will be when you cash in some or all of your bond. The tax payable at the point of a chargeable event will depend on your highest marginal rate at that time.

This allows you to defer such an event until you are either no longer a tax payer or have moved from being a higher rate tax payer to a lower or basic rate tax payer or have moved to a country with low taxes.

Inheritance Tax Planning
Structuring your assets through an offshore bond held in trust can mitigate, or avoid altogether, taxes due when transferring wealth.

Self-Assessment friendly
As offshore bonds are non-income producing assets there is nothing for you to report to Her Majesty’s Revenue & Customs until a chargeable event occurs, for instance when you cash in more 5% of total premiums paid.

You do not have to include any information on your tax return before this point, compared with the potentially complicated requirements for reporting a portfolio of unit trusts. At that point you need to include information on your tax return under self-assessment, it is generally much simpler to report income from an offshore bond.

Seven benefits of an offshore bond for UK expatriates 

1. Time apportionment relief

Any UK tax will be reduced proportionately for time spent non-resident. Additional investments are deemed to be made at the commencement of the original contract.

2. Gift Assignment

No income or capital gains tax charge on assignor.
All future tax charged at the rate of the new owner.

3. Trusts
Possibility of reducing or eliminating UK inheritance tax liabilities; Generation planning and asset protection advantages (avoid probate issues).

4. Deemed tax credits
15% deemed gain is calculated at the end of each policy year, but is not taxable unless the policyholder is UK resident. The 15% deemed gain which accrues during the period of non-UK residence is deducted from the final surrender value, potentially reducing the gain.

5. 5% tax-deferred withdrawals yearly
5% of the initial investment yearly withdrawals are allowed without immediate UK tax charge.
5% is cumulative if not used.

6. Top Slicing
Gain is divided by the number of years the policyholder was UK resident. This reduced number is added to taxable income in the year of surrender, which may avoid higher rate (40%) and additional rate (50%) of UK income tax on very large taxable gains.

7. No five year rule
Subsequent expatriation for short periods may avoid UK tax. No need to expatriate for five years as with assets subject to capital gains tax… simply spend a complete tax year outside of the UK to avoid the tax.