UK Tax and Structures: Offshore or Portfolio Bonds
An offshore portfolio bond is a tax efficient wrapper that can hold a variety of assets like stocks and shares or mutual funds. This is a bond that adds the legal and tax shield of a life insurance policy to an investment portfolio. It is structured to simply combine a life insurance policy and a portfolio to create a wrapper that investors can buy, manage and sell their assets through it.
The investment funds held within offshore bonds grow free of year-on-year taxation, unlike comparable OEICs, which are taxed annually on capital growth. Some of the individual funds within an Offshore Bond may be subject to withholding tax
You won't be liable for capital gains tax when you sell a profitable fund to purchase another fund within your offshore portfolio bond
Wrapping your offshore portfolio bond in trust means you can offset or wholly mitigate taxes due when transferring wealth
Why consider offshore bonds?
Offshore bonds are perhaps most commonly thought of as offering a tax advantage for, but there are a number of other aspects that make them attractive for a wide range of investors:
• Virtually tax –free investment growth
• Greater control over how much, and when, tax is paid
• Superior investment choice from around the world
• Trusted global brands serving the needs of the market
• Highly reputable jurisdictions all with regulations to protect investors
• Product flexibility and choice
• High quality service
• Suitable investment for individuals, trustees and companies
Virtual tax-free growth
Often referred to as the 'gross roll-up' effect, investment in an offshore bond grows free of year-on-year income tax and Capital Gains Tax charges, unlike comparable onshore bonds. Small amounts of irrecoverable withholding tax may be payable on certain investment funds.
Tax deferment is a key feature of offshore bonds. Compared with an onshore bond you will have greater control on how much, and when, income tax is paid. This enables you to choose when a tax charge may occur, for example when you cash-in some of or your entire bond. The tax payable at the point of a chargeable event will depend on your highest marginal rate at that time, giving the option to defer such an event until you are either no longer a taxpayer, or have moved from being a higher rate taxpayer to a basic rate taxpayer, or have moved to a country with lower taxes. You can also benefit from top slicing tax relief, as explained below
Access to money
For many investors today, the ability to take regular withdrawals from their investments is very important. Most offshore bonds enable you to have access to some or all of your investment monies should you need to. Investing in an offshore bond keeps your options open. Regular withdrawals can be taken from an offshore bond soon after investing or that decision can be deferred until a future date.
This can be done through the 5% deferred tax withdrawal facility, which allows you to turn your existing capital into a tax-efficient income stream. A growth investment strategy can be followed initially, with a subsequent switch into income generating investments if and when that is desired. With the 5% deferred tax withdrawal facility you can take regular withdrawals from your offshore bonds, accessing the capital in a tax efficient way by withdrawing up to 5% of each investment amount every year without an immediate liability to tax. This is a very valuable benefit for higher rate taxpayers.
Taking similar withdrawals from a portfolio of unit trusts may result in an annual tax charge. 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.