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Vive les tax differences

Last week, I started to describe some of the main differences between offshore roll-up funds and offshore bonds, in the context of proposals in the Government&#39s consultation document on offshore funds.

As I pointed out, anyone advising clients where an offshore investment may be appropriate has to make decisions regarding the suitability of any particular investment based on the law as it is but taking account of the possibility that it may change.

They must ensure that they are well aware of the tax and commercial implications of exiting that investment should the tax rules change as a result of the consultation and should also make these consequences clear to the investor before the commitment is made.

Offshore roll-up funds and offshore bonds are currently the two main choices for investors looking for an offshore investment that produces no income along the way, leaving aside, for the moment, entirely growth-oriented distributor funds, that is, distributor funds that have nothing to distribute.

On the basis that these two investments are at least conceptually taxed in the same way, let me continue to outline some of the main differences between them:

•If an investor in a roll-up fund dies, he will be treated as having realised his investment for a value equal to that which applies on death. With a distributor fund, the investment is revalued at death for capital gains tax purposes and no liability arises. Under the roll-up fund, however, the offshore income gain arising on the death of the investor will be subject to income tax in the normal way.

With an offshore bond, provided this is written with lives assured in addition to the investor on a joint lives, last survivor basis, the investor&#39s death will only precipitate a potential chargeable event if he is the last life assured to die. By including a number of lives assured, both investment and tax flexibility can be incorporated into the bond. Another way to side-step the potential charge to tax on the investor&#39s death is to invest via a capital redemption plan, which has no lives assured.

•It is comparatively unusual to find trusts available for use with roll-up funds and, therefore, further financial planning such as inheritance tax and CGT planning is, in practice, often restricted. On the other hand, a full range of trusts is available with offshore bonds, which enhances the ability to carry out further planning.

•When chargeable event gains arise on an offshore bond, these will be taxable on a policyholder if he is both alive and UK resident at that time. It does not matter that he may be non-UK domiciled and that the proceeds are not brought back (remitted) to the UK. All that matters is the residence status of the policyholder in the tax year of each encashment.

With an offshore fund, the remittance basis will apply. This means that if the investor is non-UK domiciled, even though he is UK resident, there will only be a tax charge on encashed funds brought back to the UK. Therefore, in this respect for the non-UK-domiciled investor, offshore funds may be regarded as being more attractive.

However, the non-UK-domiciled investor will still have the ability to use the 5 per cent withdrawal facility in respect of an offshore bond.

•For expatriate investors who own the bond while living outside the UK, non-resident relief will be available on an offshore bond to reduce the chargeable event gains. This will be proportional to the period of non-resident ownership of the policy. For example, if a bond had been held for, say, 10 years and, for half the time, the investor had been non-UK resident, only 50 per cent of the gain would be subject to UK tax.

With offshore funds, there is no non-resident relief available for periods of ownership when the investor was outside the UK. It may still be possible for the non-resident investor to rebase the investment with no tax charge prior to returning to the UK.

The validity (or otherwise) of this strategy will depend substantially on the tax regime of the country in which the investor is resident when the rebasing takes place.

“The decision”, in the words of Cilla….”is yours.”


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