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The corporate card

There is a huge untapped market of companies which can benefit from offshore bonds and accounts.

Offshore planning is usually mentioned in relation to wealthy individuals or clients moving abroad. but offshore bonds can also be used to help IFAs access the corporate market.

The corporate market has been a well discussed subject over the past couple of years but it is argued that it still offers growth potential for IFAs. The British Bankers’ Association, said at the end of 2003 there are 4.5 million small business accounts with a total of just under 40bn invested in them.

Prudential international sales manager Richard Leeson, says that this market does not get the coverage it deserves. He says: “Two and a half years ago, this was a relatively untapped market. It was estimated that less than 50m was held in offshore bonds. Even now, it has only grown to around 300m. Forty per cent of surplus corporate money in the US is invested in money market funds but it is only 6 per cent in the UK. Yet corporate customers get lower rates for deposits than individuals. Common gross rates for less than 10m are between 2.5 per cent and 3 per cent.”

Insurers believe there are a number of ways that IFAs can make better use of the cash reserves built up by small to medium-sized companies than sitting on deposit.

First, says Leeson, is to put the money in fixed-rate and instant accounts via an offshore portfolio bond. He cites a fixed-rate account paying 5.4 per cent at present. The annual management charge on offshore bonds range from 0.5 per cent to 0.75 per cent.

Onshore bonds are unattractive to corporate clients, says Leeson. “Companies get taxed twice with onshore bonds. They are taxed on the fund growth at source and companies get taxed when they cash in the bond. No credit is given to a UK company for the corporation tax. For a company paying corporation tax at 19 per cent, the rate of tax on an onshore bond is 35.2 per cent. For a company with a corporate tax rate of 32.5 per cent, they pay 46.2 per cent on an onshore bond,” he says.

In contrast, says Scottish Equitable International product marketing manager Steven Whalley, companies can use offshore bonds as part of their tax planning. As with individuals, companies can enjoy virtually tax-free growth and can defer when they pay corporation tax on any gains.

A company can time its withdrawals from a bond to coincide with years when it will have lower profits or even suffer a loss, which is known as “throw it forward”. These withdrawals can also be made when corporation tax rates are reduced. This is in contrast to the annual tax charge that is levied on money on deposits.

Whalley says: “As an example, ABC is a small to medium-sized company whose trading year ends on December 31 and pays tax nine months after the end of its accounting period.

“ABC invested in an offshore portfolio bond in January 2001, made a partial withdraw in excess of its 5 per cent allowance in February 2003 and triggered a chargeable event at the end of the policy year in January 2004 (because it took out the bond in January 2001). This is reported in the accounts at the end of the trading year in December 2004 and will not pay tax on the gain for another nine months in September 2005.

“If ABC invested in an offshore portfolio bond in January 2001 but this time cashed in the bond in full in January 2003, the chargeable event would have been triggered at the same time. This would have been reported in accounts at the end of the trading year in December 2003 but ABC would not pay tax for another nine months until September 2004.”

Many insurers offer capital redemption bonds to companies. Their advantage is they do not have any lives assured and so if a director retires, leaves the company or dies, this does not trigger a chargeable event. A capital redemption bond has a term of up to 99 years.

Friends Provident International international product manager Adrian Corkill says for each premium paid into the bond 5 per cent can be taken each year for a maximum of 20 years without incurring an immediate corporation tax liability.

He says: “If the 5 per cent withdrawal allowance is not used in any year, the unused allowance can be carried forward into the following policy year on a cumulative basis.

“The favourable tax treatment of withdrawals gives the company the flexibility to call on the original capital at any time without creating an immediate corporation tax liability. This feature can be useful if, for example, funds are needed for unexpected capital expenditure.”

Any switches between funds within the bond do not generate a corporation tax liability. Furthermore, says Corkill, by using an offshore bond, companies can choose from virtually any investment fund. Most companies will invest in money market or fixed-interest investments.

Companies can invest money in an offshore bond rather than a pension, says Origen brand development director Robert Rackliffe. By putting money set aside for a pension into an offshore bond, companies can retain access. The money in the bond also grows virtually free of tax and benefits from tax relief when it is transferred to the pension.

Another attraction, says Rackliffe, is that business assets taper relief can take the corporation tax charge down to 10 per cent. But he warns that the firm should be deemed by the Inland Revenue to be a trading company. “Advisers have to ensure that not too high a percentage of its assets are in the offshore bond,” he says.

Rackliffe says advisers need to be careful when using offshore bonds for corporate clients that it does not change their status in the eyes of the Inland Revenue. To qualify for business assets taper relief when being sold, a company must be deemed by the Revenue to be a trading company. But if a company has a high proportion of assets in an offshore bond, this might affect its status as a trading company.

He says: “It is important to ensure that high charges on the bond will not more than offset returns in the first two or three years. Insurers vary the initial and annual management charges so these are worth checking. Corporate clients like to use insurers they know are strong financially. They are attracted by the ability to defer tax and to know they can access their capital.”

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