Offshore Life Insurance Investment Bonds
What are offshore bonds?
In technical terms, they are non-qualifying whole of life insurance policies. In practical terms, they are a tax efficient ‘wrapper’, much like a pension or ISA wrapper.
Why are offshore bonds so tax efficient?
Other than a small element of withholding tax, all of the investments held within the bond accumulate tax free.
There may be some tax to pay when a ‘chargeable event’ occurs (which will be expanded upon) but a key benefit for higher rate tax payers is that they can defer paying this tax until they are basic rate tax payers, i.e. when they enter retirement.
Bonds are also assignable, so they can be assigned to a spouse who pays a lower rate of income tax.
What are chargeable events?
There are 6 chargeable events; surrender of the bond, maturity, assignment for money or money’s worth, withdrawals over the 5% permitted, death and significant variations in the contract, i.e. changes in the lives assured.
What level of tax is due?
The level of tax due is dependent on the amount of the investment gain (the difference between the total paid into the bond, plus any withdrawals, minus the surrender value) and the rate of income tax you pay, i.e. 20%, 40% or 50%.
If you are a basic rate tax payer and the level of the gain means your income has entered the higher rate or additional rate bracket, there is an option for ‘top slicing’.
What is top slicing?
Top slicing reduces the income tax that you are liable to pay by dividing the chargeable gain by the number of years that the bond has been held. This produces an average yearly gain which is then added to your income tax in the year of the chargeable event.
If you wish to draw an income from the bond, you can withdraw up to 5% of the original investment amount on an annual basis, without paying any tax on the income at that time.
Alternative to Pensions
The restrictions to contribution limits into pensions has been discussed in previous blogs but to confirm, the maximum amount you can pay into your pension on an annual basis has reduced dramatically from £255,000 to £50,000.
Although bonds do not benefit from the tax relief of pensions, for people who were previously contributing over £50,000 a year, the tax efficient environment of an offshore bond has proved a very popular alternative.
Inheritance Tax Planning
There are options of assigning the bond to a beneficiary, rather than encashing the bond and paying out the proceeds which could save a vast amount of tax due. The bond can also be set up under a capital redemption basis, so that it can be continued for up to 99 years, or until the most convenient time to cash it in.
There are more benefits of offshore bonds which are beyond the scope of this blog. I will happily provide further information if required.