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The big headline in the Budget this year was the proposal to raise the top rate of income tax to 50 per cent on taxable income above £150,000 a year from April 2010 onwards. There are several ways in which this change will affect offshore investment. The new higher rate further widens the gap between capital gains tax, levied at a flat rate of 18 per cent, and income tax. This places even more emphasis on exit planning for those who hold insurance-wrapped investments.

Utilising the 5 per cent withdrawal allowance, deferring enc-ashment until a time when one falls into the lower tax brackets to take advantage of top-slicing relief, and assignment of segments to lower-rate taxpayers is now more important that ever to ensure where possible bond gains are taxed at a fairer rate.

With very little likelihood of capital gains being made for the foreseeable future, many investment portfolios will be concentrated on income-producing assets such as corporate bond funds. In that case, those in the higher rate bracket will see half their annual return disappear in tax. This presents an opportunity for offshore bonds as they act as a long-term shelter against income tax. Combine the gross roll-up with the right exit strategy and you can avoid the higher rate liability in most cases.

For many individuals, the new higher rate of tax may be the catalyst for them to decide to leave the UK permanently, joining the estimated 200,000 who already do so each year. If you have cli-ents who are considering a move abroad, then an offshore bond wrapper may be useful in helping to alleviate tax in their new country of residence.

Finally, the new 50 per cent rate of income tax applies to trust income, which presents a great opportunity to revisit any trustee relationships you may have. If we assume that 50 per cent rate of tax is a “temporary” measure to try and replenish Government finances following bank bailouts, one would expect this rate to fall in five to 10 years to a more sensible rate.

A trust is a long-term vehicle that may not distribute funds to beneficiaries for many years. Therefore, sheltering income in an offshore bond is a strategy worth considering as it ensures that tax is only payable at the time of distribution. By this time, tax rates could have fallen again and using segmentation can ensure that in many cases the effective rate of tax is a lot lower than higher-rate tax.

The Budget also contained proposals to restrict higher-rate tax relief, which makes pensions less attractive to higher earners, and to freeze the lifetime allowance which, over time, will reduce the real value of what can be saved in a pension fund.

This means that those who have substantial amounts of money to save for retirement will want alternative provision that will sit alongside their pension. Obviously, a tiny chunk can be catered for using the Isa allowance but where do the clients go who need top-up planning?

Offshore life wrappers are key in meeting this need. When investments are held within an offshore bond, the tax treatment is the same as that of a UK pension fund, that is, UK dividends are collected net of a non reclaimable 10 per cent tax credit and interest and capital gains are tax-free.

Also, the open architecture structure of offshore bonds is in many ways similar to a UK Sipp. The client has the freedom to select from the full universe of funds in the market or to app-oint his own investment manager to construct and run an investment portfolio on his behalf. It would even be possible to view a Sipp and an offshore bond as part of the same retirement plan so one could build a common investment strategy across both wrappers.

Obviously, the major advantage a pension has over an offshore bond is the tax relief on contributions. However, this benefit comes with a price in the form of certain restrictions, including the inability to access the fund until (after the changes) age 55 and – after age 75 – they will not be able to leave the remaining fund to their family.

Also, when you put money into a pension, your original capital can be turned into taxable income on retirement. This is because the tax-free lump sum on a pension is limited to 25 per cent of the fund so the fund would have to grow by 400 per cent before an individual gets his original capital back tax-free.

Add to that the new restrictions on tax relief for high earners and the freezing of the lifetime allowance and you can see that pensions are not as attractive as they would first appear.

The position of an offshore bond is very different. First, there are no restrictions on when you can take the benefits, so the client could start taking benefits before they retire – very useful, for example, if someone wants to work part-time from, say, age 50 and needs to supplement income. The client can also leave the remaining fund to his heirs.

Furthermore, the benefits can be taken in a tax-efficient way. For example, by owning the contract with your spouse and splitting the tax bill between you.

Finally, when one takes an income from a pension fund, after deduction of the personal allowance, the income is put through the tax bands. This means that the client begins to pay tax at the higher rate after they have used up their basic rate band, currently £37,400.

Offshore bonds, however, have the added advantage of allowing a policyholder to claim top-slicing relief. This reduces the tax bill for those who are in the basic or starting rate of tax where a policy gain takes them into the higher rate of tax.

Advisers should think of offshore bonds as being complementary to pension planning rather than as a competing product. This approach will give the client the option to take benefits from one or the other in the future, depending on their own circumstances or tax position.

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