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Standard Life and Legal & General have been carrying out feasibility studies into establishing offshore insurance operations to sell products back into the UK. The fact that two of the biggest insurers are set to enter the offshore market indicates it has significant potential.

Around 60 per cent of all offshore business written by UK insurers is back into the UK. But despite strong marketing efforts, offshore insurance bonds have yet to become part of the mainstream offering of IFAs. In 2003, the Association of International Life Offices reported that global sales fell by 18 per cent.

It is estimated that offshore life sales in the UK were between £2bn and £2.5bn in 2003. But, more encouragingly, sales are expected to have recovered last year to between £3bn and £3.5bn. It is said that at £3.5bn, the market starts to become more attractive to the bigger insurers, even if Prudential, Aegon, Clerical Medical, Skandia and Aviva already have offshore operations.

Despite 2003’s fall in sales, insurers argue that this is a growing market and offers products that benefit IFAs and their clients. Ailo chief executive Stuart Fairclough says the proportion of IFAs who wrote at least one offshore case last year should have risen to between 30 and 40 per cent from 15 to 20 per cent in 2003.

Fairclough says the key to expanding sales of offshore bonds is explaining the tax planning and investment advantages of these products to clients. He says: “We have issued a series of guides to educate IFAs and investors. Bonds are one of the few ways UK investors can conduct tax planning offshore. They allow clients to defer tax and there are more opportunities to do inheritance tax planning.”

If clients invest in offshore bonds, they do not pay income tax or capital gains tax until they withdraw their money. This allows funds within a bond to grow virtually free of tax and to benefit from reinvestment of growth that would otherwise be taxed. Clients can also take 5 per cent income annually on which they do not pay tax until the bond is encashed.

The downside is that when the offshore bond is cashed in, the capital gains and income will be taxed at your client’s rate of income tax. But the tax bill can be reduced by the timing of the redemption. For example, if a higher-rate taxpayer withdraws the money when he retires, he may be in a lower tax band and therefore will pay less tax.

Offshore bonds are particularly tax advantageous for clients who plan to move abroad in the future, at which point they can cash in the bond and probably pay less tax. Indeed, this is an increasingly important market for IFAs.

According to The New Age of Retirement Migration, a report commissioned by Alliance & Leicester International, one in five older people expects to live outside the UK by 2020, which would mean a further four million expatriates.

Another advantage is that if a client switches between funds within an offshore bond, they do not pay capital gains tax on any gains that may be generated. The tax bill is only triggered when the money is withdrawn from the bond.

Onshore bonds can be used to mitigate inheritance tax but Prudential international sales manager Richard Leeson says there are a number of advantages in using offshore bonds with trusts. These include the fact that investments can grow virtually free of income tax and capital gains tax whereas onshore bonds suffer annual tax on any gains.

As a non-income-producing asset, an investor does not have to register an offshore bond on a self-assessment form until there is a chargeable event. This has the added benefit of removing the burden of record-keeping from the investor and keeps paperwork to a minimum.

Scottish Equitable International head of marketing Steven Whalley says offshore bonds can be useful in retirement planning. For example, they can act as a top-up product for UK clients who will reach the £1.5m lifetime limit on pension contributions which will be introduced from 2006.

The National Audit Office has suggested there are about 170,000 people who earn more than £100,000 and will reach the pension cap. Whalley says bonds can run alongside pensions as a tax-efficient vehicle while allowing clients to invest as much as they want and redeem when they want. Furthermore, clients who retire early and do not want to tap into their pensions before their official retirement age can use an offshore bond for income until then.

The other potential market for offshore bonds is corporations, says Royal Skandia marketing manager Nic Burton. Companies can enjoy the same tax-deferral advantages of using offshore bonds as individuals. A capital redemption bond can have multiple lives assured, which is designed so a company will not suffer a chargeable event when holding the bond.

Insurers argue that it is not only tax advantages that make offshore bonds attractive. Gareth Maguire of Canada Life International says offshore bonds provide access to a greater range of funds than is available onshore. There are about 2,000 unit trusts from which to choose in the UK but there are tens of thousands of offshore funds, without counting more than 7,000 hedge funds.

Offshore investment bonds offer in-house funds and selected third-party funds. Offshore portfolio bonds enable investors to pick any funds of their choice.


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