Offshore Bonds: The Attractions for High Earners.
When it comes to finance, holding assets offshore often conjures images of tax-evasion and complexity, however this is not necessarily the case.
Offshore Bonds are legitimate tax-efficient wrappers issued outside of UK jurisdiction (typically in tax-friendly jurisdictions such as the Isle of Man, Guernsey, and Jersey) and are regularly used as a component of well-diversified financial and tax planning for high earners. Like an ISA or Self Invested Personal Pension, within the Offshore Bond, you can invest in a wide range of assets such as bonds, equities, alternatives, and property.
If you utilise your full pension allowance, make your ISA contribution of £20,000, and use your annual capital gains tax allowance each tax year, Offshore Bonds should be considered as a next step in tax planning. For those individuals earning over £260,000 and who have their pension annual allowance reduced to £10,000, the use of an Offshore Bond is increasingly attractive.
Tax benefits:
While there is no tax relief on contributions to an Offshore Bond (in the way there are when you contribute to a pension) there are several notable tax advantages attached to them.
Offshore Bonds are exempt from capital gains tax, allowing capital gains to accumulate over time without an immediate tax obligation (known as gross roll up). Gains are treated as income, but taxation occurs at your marginal rate only when you withdraw money from the Bond.
5% annual accumulative withdrawals:
In addition to being capital gains tax free during the investment growth phase, Offshore Bonds offer their owners the flexibility to make annual withdrawals of 5% from the initial capital for 20 years without incurring any tax charges. This allowance accumulates over time, providing the option to defer withdrawals. Consequently, if you choose not to utilise your yearly 5%, it accumulates, enabling you to draw a higher percentage at a future date. This feature offers the dual benefit of maintaining immediate tax-deferred liquidity, when necessary, all the while fostering the growth of your funds within a tax-efficient wrapper.
Start with the end in mind:
If you are a high-rate taxpayer and higher earner, Offshore Bonds are a great vehicle to invest your savings within, allowing your funds to grow without incurring immediate tax, whilst you continue to earn income over and above the top rate.
However, it’s important to remember that, whilst there’s no immediate income tax to pay, there will be income tax to pay in the future (when you take funds out), so in an ideal scenario, a higher rate taxpayer pays in and a non or basic rate taxpayer draws the money out.
IHT and Estate Planning
Gifts to family members – Offshore Bonds are classed as an ‘assignable asset’ which means they can be transferred as a gift to someone else over the age of 18 without incurring Capital Gains Tax, or can also be gifted to a trust, again to help pass on estates in a tax efficient way.
The nature of assignment means the recipient owns the bond or policy segment and is treated as the original beneficial owner, in the same way as if they had held the bond from the initial investment date. This is particularly valuable if the recipient is a basic rate or taxpayer or whose income falls below the basic rate threshold.
Conclusion:
As you can see, there are multiple attractions to Offshore Bonds for high earners, and higher rate taxpayers. However, they need to be considered in the context of a broad financial planning strategy, and shouldn’t be considered without taking advice from a professional adviser. If you would like to learn more, please get in touch with Patronus. Contact Us