An offshore investment bond can be an attractive wrapper through which to hold your investments due to the tax deferral opportunity provided, particularly in view of the penal tax environment for higher earners.
From April 2011, individuals with UK taxable income between £100,000 and £114,950 are subject to an effective tax rate of 60%, while those with UK taxable income over £150,000 are subject to a top rate of income tax of 50%. Investment bonds can offer tax deferral opportunities where income is drawn.
An investment bond is a non-qualifying single premium whole of life policy, designed to provide growth or income on a lump sum investment. A single payment is made into the bond which can be invested in either a discretionary collectives portfolio, with a fund manager of the investor's choice, or in a range of the bond provider's own funds or externally managed funds.
The investor can take an 'income' from the bond by making use of a withdrawal facility which allows for up to 5% of the original investment to be withdrawn annually with no liability to tax. If the annual withdrawal facility is not used, it can be carried forward and used on a cumulative basis. Any withdrawals in excess of the cumulative allowance may give rise to an income tax charge at the investor's marginal rate of tax. Bonds are available both onshore and offshore. If onshore, the underlying funds are subject to income tax and capital gains tax (CGT) at the insurance company rate (most companies currently pay an average rate of tax of 16% to 18% in their funds).
With offshore bonds, the underlying funds may not be subject to tax other than withholding taxes so there can be a gross roll up effect. Unlike onshore bonds, any offshore investment bond gain is subject to basic rate tax. For taxpayers above the basic rate band there could be further income tax at higher rates, subject to top slicing relief.
These bonds can provide flexibility and various planning opportunities, for example:
- the bonds are often segmented so the investor can choose to surrender segments as opposed to the whole bond
- segments can be assigned, e.g. to family members who may be lower rate taxpayers
- switches between funds can be made simply with no liability to CGT
- trustees are increasingly considering offshore bonds as a trust investment, bearing in mind the increased tax on trust income and the ability to assign bonds to beneficiaries in the future when the profits would be subject to income tax at the beneficiaries' marginal rate of tax.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.