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Bonds beat the budget

Offshore business Simon Hildrey says sales are booming after overcoming concerns about a new tax regime

When the Chancellor revealed the new tax regime for trusts in his March Budget, many offshore insurers must have feared for their sales over the rest of the year but most firms have overcome the new regime to record increasing sales.

New flows of investments into single-premium policies are expected to break through the £6bn barrier this year.

According to the Association of British Insurers, sales of single-premium offshore policies totalled £3.38bn in the first half of 2006 compared with £2.23bn in the first six months of last year.

Sales of single-premium policies reached £5.09bn in the whole of 2005 and that total looks like it should be beaten in 2006.

Industry sources believe that only two offshore insurers suffered a decline in single-premium sales in the first six months of the year.

Sales of regular-premium policies totalled £49m in the first half against £34m in the same period last year. Regular-premium sales for the whole of 2005 were £79m.

Interestingly, offshore insurers suggest that while sales are increasing, the growth is coming from IFAs that already write offshore business rather than new intermediaries. It is estimated that between 25 per cent and 33 per cent of IFAs write offshore business.

What is driving this growth in sales? Offshore insurers consider there are a number of factors. Adrian Smith, marketing manager of Royal Skandia, says rising stockmarkets have encouraged people to invest and the increasing wealth in the UK has provided backing.

There has also been a boost from the arrival of new big insurers into the offshore market, notably Standard Life at the start of the year.

Scottish Life International sales director Simon Pack says this means there are more people talking to IFAs about offshore bonds and there is greater awareness and acceptability among advisers and clients.

Another factor has been the rise of open architecture.

Aegon Scottish Equitable International head of offshore marketing Steven Whalley says the decline in sales of with-profits bonds and the Sandler report has led IFAs to seek greater use of open architecture.

He says: “The attraction of offshore bonds is the wider availability of fund choice than through other vehicles, including onshore bonds. An offshore bond can provide access to around 10,000 funds compared with 1,000 funds by fund supermarkets and some Sipps. This is without including alternative investments.”

Whalley says investors are using open architecture in different ways.

He says: “Some are using managed or multi-manager funds, some are selecting funds, including through the use of asset-allocation tools provided by insurance companies, and others are out-sourcing portfolio management to discretion-ary managers or stock-brokers. We can delegate the custodian to these discretionary asset managers.”

Linked to this is the opportunity to invest in boutique funds that are not available in the onshore market, says Pack, and he highlights, in particular, property funds, such as Glanmore.

Whalley adds that offshore bonds are attracting cash investments. He says: “At the moment, one-year fixed interest accounts are available at a rate of 5.3 per cent for deposits of £1m or more. As the accounts are held within an offshore bond, there is no tax to be paid until the investor cashes in the bond.”

Prudential international relationship manager Richard Leeson says some IFAs and private banks are taking out offshore bonds for just one year to benefit from tax-free commission.

He says: “If a client invests £100,000 in an offshore bond, for example, they may take the £4,000 in commission tax-free. This leaves £96,000, which they hope will grow to £100,000 by the end of the year. The attraction is the fact that the commission is effectively tax-free income.”

Leeson says a growing number of private banks are using offshore bonds because they see tax planning as adding value for clients.

Pack adds that private banks are attracted by the fact that switches between funds can be made free of capital gains tax within offshore portfolio bonds.

He says: “For wealthy clients, the capital gains tax allowance of £8,800 is not very much. There is also greater awareness that offshore bonds are not as expensive as the previous common perception. If the up-front commission is not taken, then much of the cost is taken out.”

Canada Life International sales director Andy Marks believes that there is also growing awareness of the flexibility of offshore bonds.

He says: “This includes the fact that parents can assign offshore bonds to their children while they are at university. The children can access the money in the offshore bond and be taxed at their rate, which should be lower than their parents’ rate.”

Marks says the growth in demand for offshore bonds is reflected in the fact that CLI has just broken through a total of £4bn in assets under management.

He says: “It took us 13 years to 2000 to break through £1bn and just six years to gain another £3bn.”

The expansion of offshore sales has come despite the government’s introduction of the new inheritance tax regime for trusts in the March Budget. Marks says that following the implementation of the Finance Act in July, there is now growing demand for IHT plans again.

The European Union savings tax directive is likely to have boosted offshore bond sales, says Pack. Insurance policies are not subject to the 15 per cent withholding tax of the directive, which does apply to offshore bank accounts.

Smith says there has already been an impact from A-Day on sales of offshore bonds. Insurers argue that offshore bonds are appropriate for clients who have reached the lifetime pension cap, which is £1.5m in the 2006/07 tax year. This is because tax on capital gains within an offshore bond is deferred until policies are cashed in.

Insurers appear to be happy with the growth and breadth of the offshore market. Leeson says that broadening the offshore bond market among IFAs would not greatly increase sales.

He says: “If the next 1,000 IFAs start using offshore bonds, they may only have a couple of clients each who will use these bonds.”

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