OFFSHORE BONDS TO THE RESCUE



Tim Duke Head of Insurance Mediation, Praxis European Wealth Solutions

 

 Offshore insurance bonds (and by "offshore" we mean bonds issued in the EU from either Ireland or Luxembourg) are by no means new, but they are about to become one of the most important tax planning tools available for UK residents to hold their personal wealth. CGT is not applicable at all to insurance bonds, the proceeds of which are only ever subject to Income Tax, but if structured correctly they uniquely enable UK residents to decide:

a) WHETHER to pay tax;

b) WHEN to pay tax; and

c) HOW MUCH tax to pay.

There are two great myths to dispel about insurance bonds.

MYTH No 1 - They are expensive to set up.

The "high cost" image of insurance bonds exists only because of hidden commission-based remuneration structures. Praxis European Wealth Solutions (PEWS) is able to set up bespoke, sophisticated insurance bonds at NIL cost. That is no charge from PEWS and no charge by the carrier. Total annual running costs for the bond are no more than 0.5% per annum.

MYTH No 2 - The range of permitted investments is very limited.

The Personal Portfolio Bond (Tax) Regulations 1999 created an adverse tax regime for “highly personalised” life insurance bonds. Many bond investors are now limited to a choice of collective investments and internal life assurance funds. Often the life company restricts the range of investment funds that can be held within a bond.

However PEWS is able to structure insurance bonds so that they can hold a far broader range of financial assets than is possible with retail insurance bond offerings, which are usually restricted to open-ended investment funds. Examples of the type of asset that may be held are exchange traded funds, commodities, closed-ended investment funds, real estate partnerships etc.

Tax Implications for UK resident investors

  • The bond itself benefits from gross roll-up in respect of income and gains generated from assets held within it (save for non-reclaimable withholding taxes).
  • Cumulative tax deferred withdrawals of 5% per annum of the original investment are allowed (and are thus treated as the return of the original premium). Withdrawals greater than this will be subject to income tax as a chargeable event gain.
  • Subject to the level of withdrawals taken by the policyholder, no UK tax will be payable by the policyholder on the growth in value of the bond until the bond is encashed or surrendered (i.e. when a chargeable event takes place), resulting in long-term tax deferral over potentially many years. All such policy gains would generally be subject to Income Tax.
  • The timing of the portfolio encashment is entirely up to the policyholder and this timing decision can be delayed until such time that the policyholder’s marginal income tax rate is lower and top-slicing is applicable, or indeed until the policyholder may be resident in a lower-taxed jurisdiction.

FOR MORE INFORMATION CONTACT:
Tim Duke
Email tim.duke@praxisgroup.com
Tel +44 (0) 1481 737678

David Piesing
Email david.piesing@praxisgroup.com
Tel +44 (0) 1481 737601

Praxis European Wealth Solutions is a trading name used by Fundamental Asset Management Limited for the provision of insurance mediation services. Fundamental Asset Management Limited is authorised and regulated by the Financial Services Authority. The company is incorporated in England and Wales.

This article has been prepared as a general guide. It is not a substitute for professional advice. Neither the Praxis Group nor its directors or employees accept any responsibility for loss or damage incurred as a result of acting or refraining to act upon anything contained in or omitted from this article.