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Rule changes mean more offshore bonds can qualify for time apportionment relief

A recent rule change means more offshore bond investors who have spent time abroad can reduce the tax liability on their investment gains.

Offshore single premium policies have been around for a long time and one of their big attractions is the gross roll-up, which is available within the funds.

Gross roll-up refers to the fact that the funds themselves are not liable to taxation aside from any non-reclaimable withholding tax on some dividend income. It is the individual policyholder who is responsible for any tax which falls due, with any gains under the policy being added to their other income and taxed at the appropriate rate.

Clearly to get the true benefit of gross roll-up, the ideal thing would be for chargeable gains to arise when there would be no tax to pay on any gain. Assigning policies to individuals who are at university and have no other income, or the use of bare trusts in non-parental settlements for minors to assist with school fees planning are two such cases in point.

Of course, if policies are encashed when the policyholder is non-UK resident there will be no income tax liability. But what if the policyholder has had a period, or periods, of non-residence while the policy has been in force?

Time apportionment relief has been available in respect of offshore policies for many years. The relief operates so that where a policyholder has been non-UK resident for a period during the existence of a policy, when a chargeable event gain arises under the policy, the gain should be worked out in the normal way, but it should be reduced by the period of non-UK residence (as defined by the Statutory Residence Test) as a proportion of the total period the policy has been in force.

Since 6 April 2013, time apportionment relief has been extended to cover new policies issued by UK-based insurers on or after that date as well as policies issued by UK insurers before 6 April 2013, which are varied on or after that date in such a way that results in an increase in the benefits secured, where such a policy is assigned from one individual to another or into or out of a trust.

The way that time apportionment relief works is that if a chargeable event occurs on or after 6 April 2013, the gain is apportioned using the formula A divided by B where,
A is the number of days that are foreign days in the material interest period (see below) and B is the total number of days in the material interest period.

Foreign days are all the days in a tax year for which the individual is not UK resident and any days in a split year in which the individual is taxed as if not UK resident.

The meaning of foreign days for the purposes of the above calculation depends on whether the policy held falls under the new rules applicable from 6 April 2013 or the previous rules for time apportioned reductions.

Under the old rules foreign days are days on which the policyholder is not UK resident and days falling within the overseas part of any tax year that is a split year in respect of the policyholder, provided the policyholder is an individual.

Under the new rules foreign days are days falling within any tax year for which the individual liable to tax on the gain is not UK resident and days falling within the overseas part of any tax year that is a split year in respect of the individual liable to UK tax on the gain.

The material interest period is the part of the policy period during which the individual meets one of the following conditions:

  • the individual beneficially owns the rights under the policy or contract
  • the rights are held on non-charitable trusts which the individual created
  • the rights are held as security for the individual’s debt.

The policy period is the period for which the policy has run prior to the chargeable event.

The decision to extend the availability of time apportionment relief to policies affected with providers based in the UK is to be welcomed. However, it should be remembered that UK life funds suffer tax themselves at, broadly, the basic rate and there is no ability to reclaim this tax deducted at source even if the beneficial owner has had a period of non-UK residence.

Time apportionment relief will therefore only ever be available on the net gain, whereas, for policies affected through non-UK providers, the relief will be available on the gross gain. This fact would appear to make such policies more attractive where it is known that policyholders are likely to have periods of non-UK residence during the currency of the policy.

The complexity surrounding this topic has led HM Revenue & Customs to publish a series of frequently asked questions on its website and this guidance is available at

Brian Murphy is financial planning manager at Axa Wealth



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There is one comment at the moment, we would love to hear your opinion too.

  1. My very great friend in Rome 17th October 2013 at 2:34 pm

    What, pray, is an Offhore Bond? I’ve never sold one of those before.

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