Offshore Taxation

Offshore Taxation

Offshore bonds are usually situated in jurisdictions which impose no tax on investment funds, for example Dublin, the Channel Islands and the Isle of Man.

  • Income
    Interest, dividends and rental income are tax free. Some non-reclaimable withholding tax may apply to certain overseas income
  • Capital
    No corporation tax is payable on capital gains

Personal Taxation (income tax)

Withdrawals of up to 5% per annum of the amount invested can be taken on a cumulative basis without any immediate income tax becoming payable. Any gains will only be assessed for income tax purposes when a chargeable event occurs, i.e. withdrawals above 5% pa cumulative are made, full surrender of entire bond or full segments, death of last life assured. Gains are added to the individual’s other income in the tax year to determine if any tax is due and if so at what rate(s).

There will normally be at least 20% tax due on an offshore bond gain unless the gain is completely covered by the Personal Allowance, starting rate income band for savings and/or Personal Savings Allowance.

No 20% credit is available as the fund isn’t subject to UK tax. 

The gain will be taxed at: 0% if covered by the allowances described above; 20% on gains falling within basic rate band; 40% in higher rate band; 45% additional rate band. Top slicing relief is available when assessing whether higher or additional rate tax is due.

With offshore bonds that started before 6 April 2013 and that haven’t been added to or assigned since that date, the top slicing period dates back to inception on both full and part surrenders. For offshore bonds that started on or after 6 April 2013 (or older bonds that have been added to or assigned since that date) and where the policyholder has been UK resident throughout the life of the bond, the top slicing period goes back to inception for full encashments or back to the last chargeable event (if there has been one) on part surrenders.

The full gain before top slicing is added to income to assess entitlement to the Personal Allowance (i.e. if the full gain takes income above £100,000), Married Couple’s Allowance (only available if born before 6/4/35), Child Benefit, Personal Savings Allowance.

For gains occurring in 2018/19 onwards, when assessing the tax due on the slice, the availability of the Personal Allowance is assessed using the slice rather than the full gain(s).

Time apportionment relief can be used to reduce the gain for any periods of non-UK residence (this facility has been in existence much longer for offshore bonds).

It can be difficult to determine in any particular case which might offer the best solution for a client – onshore or offshore bond (where it has been decided that a bond is more appropriate than a collective or other investment).

Various issues clearly need to be taken into account as well as taxation, for example charges, fund choice, investor protection etc.

There are particular categories of individual for whom one type might be preferable to another, i.e. those who are UK resident but not UK domiciled (or deemed to be UK domiciled) may benefit from the fact that an offshore bond has neither taxable income or gains until a chargeable event occurs. If such an individual has no income or gains, they can choose to be taxed on their worldwide income without any extra tax liability, and avoid the need to pay the remittance basis charge whilst keeping their UK income and capital gains tax allowances. Care needs to be taken if withdrawals are taken from the bond though as, even if within the 5% allowances, these could still be treated as a remittance of untaxed income or gains when paid to the UK if any part of the capital used to purchase the bond contained any untaxed income or capital gains.

If a tax charge arises on an investment bond in a tax year when the individual is no longer UK resident then there will be no liability to UK income tax (but see below) but there may still be a liability to tax in their country of residence.

Finance Act 2013 introduced anti-avoidance measures whereby chargeable event gains arising during a temporary period of non-residence are taxable on the individual’s return. This is similar to the CGT rule and will apply where an individual:

  • Has been resident in the UK for a period of at least four of the last seven tax years, and
  • Becomes resident again within five years of leaving

Non-domiciled individuals are subject to UK inheritance tax upon their UK situated assets. An offshore bond will not form part of the estate of a non-domiciled individual upon death but there may be a liability to tax in their country of domicile. If the bond is placed within an excluded property trust it will be sheltered from inheritance tax even if the individual subsequently becomes UK domiciled or deemed domiciled.

Changes to the non-dom rules from April 2017 mean that anyone resident in the UK for more than 15 out of the previous 20 years will be deemed to have a UK domicile for income tax, CGT and IHT purposes and no remittance basis will be available to them. Excluded property trusts set up whilst classed as non UK dom will still be effective.

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A&J Wealth Management Ltd

Sawfords

Bigfrith Lane

Cookham Dean

Berkshire

SL6 9PH

01628 480200

enquiry@ajwealth-management.com

© 2024 A&J WEALTH MANAGEMENT LTD A&J Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. Financial Services Register, no 428590, at www.fca.org.uk/register Registered in England, Company no: 5105933. Registered Head Office: Sawfords, Bigfrith Lane, Cookham Dean, Maidenhead, Berkshire SL6 9PH

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