Therefore, even before considering the merits of offshore investments, clients need to be reassured about the levels of investor protection available through offshore markets. The products tend to be regulated by the FSA as well as by the local regulators, so investor protection is often excellent.Further, far from being restricted to wealthy investors, there are a number of bonds which accept premiums from 15,000 to 25,000, while 40,000 will gain access to the majority of offshore bonds. AIG Life, Friends Provident International and PanEuro Life’s products will accept investments from 5,000. If we restrict ourselves to considering UK-resident taxpayers – the main market for both offshore and onshore bonds – then they share many similarities. Both are single-premium, non-qualifying, whole-of-life policies. But there are some important differences in tax treatment, meaning you have to consider the client’s circumstances and objectives carefully before selecting which option to pursue. Looking at taxation within the bond, onshore bonds pay corporation tax at 20 per cent on gains in the fund but can use indexation relief to reduce the amount of taxable gains. There is 20 per cent corporation tax payable on interest, overseas dividends and rental income (many bonds invest in commercial property) but UK dividends are received with a 10 per cent tax credit, satisfying the fund manager’s liability. With the exception of UK equity income, annual management charges can be set against income but there must be sufficient income for relief to be available. Offshore bonds pay no corporation tax while interest and gains effectively roll up tax-free, apart from any non-reclaimable withholding tax. Credit for withholding tax is not given in any chargeable gain calculation. Equally, no indexation relief is available to reduce gains. Last, as there is no tax to pay, offshore bonds receive no corporation tax relief on the management charges, reducing the effectiveness of the gross roll-up. Turning to the taxation of individual bondholders – excluding trustees, charitable trusts and pensions – basic-rate (pre-April 2004) or lower rate (after April 5, 2004) income tax is deemed to have been paid in onshore bonds, so when a chargeable event occurs there is no further liability for non-, lower- or basic-rate taxpayers, unless the gain takes them into the higher-rate income tax bracket. As offshore bonds have paid nothing but withholding tax, no such basic-rate tax credit is given to investors and the full gains are liable to income tax at the policyholder’s highest rate. Non-taxpayers can offset their personal allowance against the gain. The lower rate is at 10 per cent while the liability for basic-rate taxpayers is 22 per cent for chargeable events arising before April 6, 2004, falling to 20 per cent after that date. Higher-rate taxpayers pay 40 per cent on the full gain. Top-slicing rules for full surrender of onshore bonds are based on the number of years the bond has been held. For partial surrenders, they are based on the gain divided by the number of complete policy years since the last chargeable gain or the outset of the bond if this is the first encashment. So far, so good – this is all well-known territory. But top slicing is slightly different for offshore bonds. It can still be used to determine whether any higher-rate income tax is payable, as with onshore bonds, but remembering that all the gain will be taxable, not just the higher-rate liability. Notably, top-slicing is always taken back to the date of the original investment, even when a chargeable event has arisen previously. The restriction is that the period used for top-slicing is reduced by the number of full policy years the policyholder has been a non-UK resident. In both cases, the 5 per cent rule applies and the policyholder can take up to 5 per cent of the amount originally invested each year with no immediate liability to income tax. If they do not use the allowance, it can be carried forward indefinitely, so that they can encash up to 100 per cent of the original investment tax-free after 20 years. It would seem logical that onshore bonds will not be app- ropriate for expatriates or those spending a significant amount of time abroad. However, Revenue concession B53 means that if an individual is non-UK resident throughout a year of assessment after April 1999, they will not be liable for UK income tax on any chargeable gains arising during that year. They will remain unable to reclaim tax paid within the fund, however. For offshore bonds, time apportionment relief applies. For this purpose, a fraction is applied to the gain, representing the number of days a policyholder is UK resident divided by the number of days the policy is in force. Overall, life insurance bonds, whether onshore or offshore, can offer policyholders some tax advantages. Their principal disadvantage is they create a liability to income tax, not capital gains, meaning that many less sophisticated investors are paying income tax, whether within an onshore bond or arising from a gain in an offshore bond, when they could have used their capital gain tax allowances instead. Therefore, after an investor has taken out a growth Isa each year (not an equity income Isa, at risk of starting another debate), investments producing capital gains need to be considered next. Having eventually arrived at life insurance investment bonds, it would seem that non-taxpayers and those in the higher-rate tax band may find offshore bonds more beneficial. Lower- and basic- rate taxpayers may well be advised to benefit from gross roll-up but only if a cost-effective policy can be found for their modest investment. In reality, many prefer the lower cost of onshore bonds and the simplicity of having their tax deducted at source.
Universal Balanced Collection Fund
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