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What advisers are saying: Offshore bonds vs funds

Phil Wickenden Technical Area 200

You do not have to be a doctor to know how important the heart is. But back in ancient Greece, you could be a doctor and still have no idea how important the heart is.

Back then, doctors such as second-century Greek physician Galen believed that the liver, not the heart, circulated blood (along with some bile and phlegm), while the heart circulated “vital spirit”. What’s more, these ideas stuck around for a very long time – right up to the 17th century.

There is clearly an element of “historic acceptance” to the offshore bond being the offshore product of choice. This is largely because over the years offshore bonds have represented advisers’ widest exposure to offshore products substantially due to the activities of the offshore arms of UK insurers in promoting these products.

The tax efficiencies of the offshore bond (eg deferment and tax management) make its qualities as a tax-effective vehicle easy to explain: tax deferment, control, flexibility. Most advisers “get” these funda-mentals.

It is clear that, compared with offshore bonds, offshore funds are seen as less important in the financial planning process. They are certainly less talked about in relation to tax planning than offshore bonds and represent less than 5 per cent of all offshore business.

In relation to reporting funds (the predominant offshore fund type) there is very little, if any, tax difference over UK funds. Non-reporting funds offer tax deferment but, with
the investor realised gain being subject to income tax, there seems to be little appetite for these in tax and financial planning – with offshore bonds offering a more appealing and better known alternative.

In relation to estate planning, holding offshore funds in trust presents a more complex to manage proposition and where you can access all the investments you need through most offshore bond wrappers (on or off platform) there is no obvious benefit. 

There is also the fact that, save for most platforms, accessing an appropriate “retail” draft trust wording to work with an offshore fund (as opposed to a bond) will sometimes present a challenge.

Nevertheless, having an awareness and understanding of available offshore funds – that there are two generic types, how they are taxed and how they compare with alternatives (eg UK funds, offshore and onshore bonds) – will be an essential part of adviser understanding, especially for those focusing on the upper end of the market. 

Advising without this awareness will be impossible to justify. Providers and platforms that can support this understanding will position themselves well as professionals in this market.

Phil Wickenden is managing director of So Here’s The Plan phil@soherestheplan.com

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All quotes have been taken from interviews with qualified financial advisers

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