Offshore Bonds and Tax Efficiency
With the correct expat financial advice, offshore bonds can provide significant tax advantages over other investment platforms. Being managed on a fee-basis with all commission structures removed will help you maximise the features offshore bonds were designed for. Below are some of the benefits you could enjoy with a qualified expat financial advisor providing prudent advice designed around your circumstances.
Gross roll-up means bonds are not subject to income, corporation or capital gains tax in the location where they are domiciled. As this often includes offshore locations such as Isle of Man, Jersey or Guernsey, any growth within the bond is free of tax, although dividend payments may attract withholding tax at origin in some countries.
Offshore bonds can be used by investors of all nationalities, and may provide protection from taxation in the country where you live until capital is required. Many countries require annual reporting of investment profits or gains made on transactions, but bonds often shield investors from these requirements until withdrawals are made. This means capital that would have otherwise been paid in tax, remains invested and enjoys the effect of compounding which over time, can have have a significant effect on returns. Withdrawals are then assessed as both capital and growth, with tax usually due on the gain element only.
The ability to 'assign segments' of bonds to others people is a significant advantage over other platforms. When opening a bond, it can be split into hundreds or possibly thousands of individual 'segments', each representing an equal portion of the capital invested (eg. £500,000 split into 1,250 segments of £400).
Each segment grows proportionately with the bond's value. When funds are withdrawn, the policy holder can assign segments to other individuals and by doing so, reduce their own tax liability by transferring it over to the assignee.
This makes bond segmentation ideal for higher-rate tax payers to gift capital to family or loved ones on lower tax rates. Among the most popular uses for segmentation is to provide university funding or help children get on the property ladder, as their incomes and tax rates are likely to be lower.
In an example, a bond has has made gains of 50% over time. The bond holder wishes to assign segments worth £22,500 to their children in the UK. £15,000 is seen as invested capital and the remaining £7,500 is growth (£15,000 + 50% growth), so tax is due on the growth element only.
As the personal tax allowance in the UK is currently £12,570 (22/23), no tax would be due on the £7,500 growth unless the assignee is earning more than the personal allowance. Even then, it's likely to be less than the higher-rate tax-paying bond owner. Put simply, the bond holder can reduce their tax liability by using the tax allowances of other individuals.
Taking Withdrawals and Income
Offshore bonds are often used as an investment platform when non-insurance wrapped options may have been more suitable (in a pension structure, for example). But it's taking a tax-deferred income from non-pension assets is where offshore bonds provide the most benefit.
Using a repatriating expat as an example, before returning home they are required to 'endorse' the bond with the provider and thereafter, will be entitled to an annual 5% tax-deferred income in addition to a lump sum equal to 5% for every year the bond has been open.
Initial lump sums and 5% income is taken from the original 'invested capital' until it is exhausted over 20 years - ie. 5% x 20 years = 100%. Thereafter you are be deemed to taking gains and will taxed at your marginal rate. Annual withdrawals greater than 5% of the initial investment will also be taxed.
It is important to clarify how your offshore bond will be treated locally where you expect you'll be taking withdrawals. It's also vital to remember that offshore bonds can still be sold with lock-in periods that facilitate large commissions payments to financial advisors at the outset. The golden rule is that if financial penalties apply for closing the bond at anytime, find an advisor that operates on a fee-only basis and will remove the commission structures for you, and that's where we can help you.
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If you would like to speak to an expat financial advisor that can answer questions on offshore bonds and explain how to use them correctly, contact us today and our team will get right back to you.