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Buoyant forces

Offshore life business Simon Hildrey examines some of the main factors which helped offshore policy sales grow strongly to around 4bn last year

The offshore life sector has been buoyant for the past two years, leading to the expectation that sales of offshore insurance policies will have broken through the 4bn barrier last year.

In 2002, offshore life insurers sold 2bn worth of policies in the UK. This increased to 3bn in 2004 and had already reached 3.3bn by the end of the third quarter of 2005.

It is estimated that the UK accounts for around 50 per cent of offshore life sales around the world.

The buoyancy of the offshore industry is reflected in the recent launch of Dublin-based Standard Life International. Many life offices believe this demonstrates that the offshore life industry is moving away from being a niche market towards the mainstream.

But is the expansion sustainable? Insurers suggest there could be further growth but not at the pace of the past couple of years.

SLI chief executive Murray Drummond says there are a number of reasons why offshore insurance sales have doubled over the past three years. He says: “The Government has closed a lot of other tax planning options. This has made the tax deferral of offshore bonds more attractive.

“The top 100 to 200 IFA firms still write most of the business but offshore has a lot more credibility in the market than 10 years ago. The regulatory regime is robust, which has made IFAs more comfortable using offshore products and there is more awareness about the benefits.”

Drummond adds that the decision to launch SLI was motivated partly by the ability to offer offshore products to potential multi-tied advisers. “This was not the main reason but we have seen demand from multi-tied advisers as well as IFAs more generally for offshore bonds,” he says.

SLI is also targeting private banks and discretionary managers. Demand from private banks is cited by insurers as one of the most important factors behind the growth in sales of offshore products.

Prudential international sales manager Richard Leeson says: “Demand from IFAs has grown by between 10 and 20 per cent a year but the most significant contribution has come from private banks. Three or four years ago, the biggest private banks were not using offshore bonds but many of them have started to recommend them to clients since then. One reason is the Government clamping down on numerous tax planning schemes for inheritance tax and capital gains tax.”

Scottish Equitable International head of offshore marketing Steve Whalley says the downturn in stockmarkets from 2000 slowed investment into equities and prompted private banks to examine other opportunities, including tax planning through offshore bonds.

One such growth area has been the use of trusts to mitigate IHT. Prudential taxation and trusts manager Paul Kennedy says: “Insur- ance plans are bringing IHT planning more to the mass market. Bespoke trusts for IHT planning are too expensive for most investors. But with research suggesting that around four million estates will be subject to IHT by 2009, this is no longer a tax confined to the very wealthy.”

Kennedy points out that insurers obtain legal opinion on their IHT trusts and have written statements from HM Revenue and Customs that they are not subject to the pre-owned assets tax.

Another growth factor, according to insurers, is growing interest in cash bonds among corporate and individual investors. By using offshore bonds, corporate clients can determine when they pay tax, such as in a year when there are lower profits or no profits.

Individuals can hold an offshore bank account through an offshore bond and not face an annual tax bill as they benefit from gross roll-up, says Whalley. This means that investors only face a tax bill on gains and interest when the bond is cashed in.

Linked to this is the EU Savings Tax Directive, under which offshore bank account holders pay a 15 per cent withholding tax every year or have details of their accounts passed to HMRC. Offshore bonds, however, have benefited from not being subject to the directive.

Whalley also identifies growing interest in open architecture and wider investment choice via offshore bonds as a driver behind higher sales.

In conjunction with this, there has also has been a decline in sales of with-profits bonds. Skandia investment marketing director Ian Thomas say that offshore bonds have benefited from this fall in sales.

He says: “IFAs have been looking for replacements for with-profits bonds. Offshore bonds can offer a wide investment choice. Indeed, portfolio bonds provide an almost unlimited choice of funds from inside and outside the UK.”

Thomas says the growth in offshore life sales should continue. “Surveys show that ever increasing numbers of people want to retire abroad and are buying property overseas. This leads to potentially greater interest in offshore planning.”

Thinc Financial Planning investment director Ian Shipway uses offshore bonds for clients and believes the growth in the market is largely due to the greater professionalism of advisers, growing awareness of the benefits of offshore bonds and the high standard of regulation in jurisdictions such as the Isle of Man.

But Shipway says he recommends offshore bonds to clients on a selective basis. “Clients need to have at least 250,000 to 500,000 to make it cost-effective to use offshore bonds. This is after they have used their Isa and pension allowances. Below 250,000, we can manage clients’ capital gains tax liabilities without offshore bonds,” he says.

Shipway adds that offshore bonds do not have to be expensive. The expense comes if an adviser takes high up-front commission.

He says the ability to defer tax is a far bigger attraction of offshore bonds than the investment choice argued by insurance companies. “The investment flexibility is available through other vehicles than offshore bonds,” says Shipway.

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