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The challenges of providing offshore bonds

The various tax regimes across the world have always been a headache for advisers, but a modern pan-European approach from Dublin and Luxembourg is simplifying matters for globetrotting clients

Richard Leeson Axa Wealth 2012

Over the past 10 years, advisers have increasingly challenged offshore providers to develop products that are truly effective for geographically mobile clients.

Since the early 1990s, providers have promoted the benefits of offshore life bonds for UK-resident investors through the adviser market. One of the main attractions is that such bonds simplify tax when an investor moves abroad.

Broadly speaking, the product is not taxed while the client is a UK resident, but falls under the taxation regime of the country to which the client moves. Often that regime will have a more favourable policy on taxing chargeable gains.

In the past, advisers have been frustrated by providers’ unwillingness to give information on the tax regimes that will apply to their clients. Many providers would not offer tax information even on popular destinations such as Spain, France and Portugal. This was driven partly by the fear of being liable for losses through misunderstandings or through changes to foreign tax policies, for which providers are not indemnified.

However, there have been improvements in recent years, with more providers offering access to exactly this sort of information. This has fuelled demand from advisers for products that can be genuinely ‘passported’ to other countries – ones that can be recommended in the UK but also qualify for favourable tax treatment in the destination country.

On the surface, this looks like an exciting opportunity for providers. But on closer inspection it becomes more problematic. A product that can be topped up would mean the provider having to ensure it can comply with business rules in each of the countries the client might move to. This would be both expensive and labour intensive and significantly increase risks for the business.

It is difficult to keep up to date not only with changes to taxation but also with changes to financial services regulations and general law. This has proved a significant barrier to the development the market has been crying out for.

With the RDR almost upon us, there is even more demand from advisers as the move to advice-based services increases the pressure on providers to develop more modern products.

With Dublin and Luxembourg increasingly popular as a base for life companies, significant efforts have been made to maximise the benefits of EU membership in terms of freedom of services to market products across borders.

Some Luxembourg-based providers are already marketing pan-European products and it is believed a number of Dublin-based companies are not far behind in developing similar solutions.

In essence the underlying product is the same portfolio bond that has been around for more than 20 years. The difference in the new products is that they can be altered to match the rules of the local tax regime in the destination country.

This is a good thing, but advisers need to be careful in how these products are marketed. The provider will not take liability for the taxation treatment of their product; this has always been true, even within the UK market, and the standard caveats will apply. It is important for advisers to ensure that their clients fully understand this and that almost every year the tax rules change in at least one country in Europe, let alone the rest of the world.

The message should be that these modern products are offered on a ‘best endeavours’ basis.

With the current economic climate, more tax changes are likely as different European countries try to balance their budgets and reduce their debt burdens. In the past year alone Spain has extended a wealth tax and France has overhauled its equivalent of inheritance tax.

Perhaps in the future we will see a more uniform approach to the taxation of life policies in the EU, but this is still a long way off.

In the meantime, until clients and advisers have the certainty of the tax treatment they desire, we must all do our best in an imperfect world.

Richard Leeson is sales and marketing director at Axa Wealth International


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

  1. “doing our best” that means locking clients in to 8 year contracts on a single premium cont.! Hiding the costs with ‘fund value’ not surrender values for the glossies. 8% upfront commissions plus up to 2% adviser annual charge et al. Clients never going to make any money with 5% annual ongoing charges for it all- and that’s your best? By the time most clients realize the adviser is long gone and the complaints department offshore standard response is “you signed the contract”- nice people.

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