Offshore providers recognise that investors have very specific needs and offer high-quality solutions to meet these needs. Offshore bond providers can boast of innovative product designs and high-quality administration and servicing capabilities. In the past, however, it could have been argued that a proportion of their UK-based sales relied on tax loopholes that could be better exploited with offshore rather than onshore bonds.
Historically, a UK investor using an offshore bond wrapper could place their entire share portfolio and other assets into a so-called highly-personalised bond and defer all income and capital gains tax indefinitely. Another loophole was provided by the so-called dead-settlor rule, which allowed trustees and beneficiaries to avoid paying any income tax whatsoever, provided that the bond was encashed after the year following the death of the person who set up the trust.
The spouse-alienation or Eversden-type trust was yet another loophole from which offshore bonds benefited. A series of manoeuvres made it possible for a married couple to make a gift that was effective for inheritance tax purposes while they still benefited from the trust. In effect, they achieved a full inheritance tax saving after seven years while maintaining full potential access to the original capital and growth.
So given that many loopholes no longer exist, why do sales of offshore bonds in the UK continue to grow? According to the ABI, UK offshore bonds sales grew by 13.7 per cent over the last year and sales in the first quarter of 2004 were 49 per cent higher than the last quarter of 2003.
The answer to the success of offshore bonds in recent years lies with innovative and flexible product designs and high-quality admin and servicing. By investing offshore, investors can have more extensive investment opportunities than those available onshore. Furthermore, offshore bonds continue to allow for many tax planning opportunities not found with onshore counterparts.
A number of offshore providers have chosen to specialise, some focusing on geographic areas outside the UK, others on the UK. Those providers focusing on the UK often seek to exploit inheritance tax-based opportunities by offering a range of planning solutions. With increases in house prices and general wealth, inheritance tax has become a potential issue for an ever increasing proportion of the population.
Those providers focusing on UK investors will hope to benefit from mobile working trends and the increasing numbers of people who aspire to retire abroad. A recent survey by Prudential found that 45 per cent of Brits have an appetite to live abroad permanently in retirement. An offshore bond is often more desirable for potential émigrés and can provide investment and tax advantages beyond those of the onshore counterpart.
Providers focusing on the UK may benefit from the forthcoming changes to pension regulation. In April 2006, annual pension contribution limits will be replaced by a lifetime limit. Investors will have the option of investing in more flexible investment vehicles before deciding if they want to move monies into a pension vehicle. When they move the money, they will benefit from pension tax relief at that time. Offshore bonds will be one of myriad options for these deferees and may be an attractive option.
Providers operating throughout the EU may benefit from changes introduced as part of the EU savings tax directive, which aims to prevent people avoiding paying tax by keeping their money in certain foreign bank accounts. Portfolio bonds will continue to offer investors a way to stay in cash and legitimately defer tax under the normal offshore bond rules.
Some providers continue to focus on with-profits bonds, promoting the time-tested benefits of with-profits such as fund diversification and smoothing of the return, with the added tax flexibility that comes with investing offshore.
Many offshore providers offer portfolio bonds. These enable investment in a wide range of mutual funds, Oeics, unit or investment trusts, cash deposits and so on within a single bond wrapper. The investment flexibility and freedom of portfolio bonds makes them an attractive vehicle for many.
Some providers focus on protection, some offer capital redemption bonds and others target corporate cash. This list goes on and will continue to expand as new needs emerge.
The outlook for offshore bonds looks bright. The key to their success is innovative product designs and high-quality administration and servicing capabilities, coupled with some unique facets that are found with offshore bonds alone.