Can an offshore investment bond work for me?
An investment bond is merely a wrapper which has underlying investments in the normal way, but because of the way the legislation works there are distinct tax advantages. Onshore Investment Bonds normally invest in Life Assurance company funds, which suffer some taxes, but Offshore Investment Bonds are more flexible and do not suffer such taxes.
Single premium investment bonds are classed as life assurance contracts, but the primary purpose of investment bonds is as an investment. The insurance element is very small. The underlying investments can be selected in accordance with an agreed risk profile.
There is no limit to the amount invested into a bond and they do not generate any tax liability year on year. Instead the tax is deferred and will be payable when a “chargeable event” occurs. Chargeable events include when the policy is surrendered or death of the last surviving life assured or where withdrawals are made over the allowable limits.
When one of these events occurs, a chargeable gain will arise and this will be subject to income tax at the owner’s appropriate rate of tax. Offshore bonds therefore work particularly well for individuals who are higher or additional rate taxpayers now, but expect to be basic rate taxpayers when they encash the bond. There is also top-slicing relief where, after adding chargeable event gains to their income, the individual becomes a higher rate taxpayer because of adding those gains.
How do I access the funds?
You are able to withdraw up to 5% each year (for 20 years) without there being a tax liability or even a report on your tax return. This is because the 5% is treated as a return of capital rather than income. Therefore an investment of £300,000 could lead to an effective ‘tax-free income stream’ of up to £15,000 per year. Alternatively a smaller income stream may be taken for a longer period of time (eg 4% for 25 years).
Real care has to be taken with the distinction between partial encashment, rather than full unit encashment, as there can be unintended tax consequences due to the way the tax calculation works.
What are the implications if I want to gift some or all of the bond to my grandchildren?
Gifting part of the bond is known as assigning units or segments and is certainly possible to grandchildren. The attraction with doing this is that they would then in turn encash some or all of these gifted units over one or more tax years making use of their unused personal allowance (2013/14 £9,440) paying no income tax at all up to this amount. This would be a potentially exempt transfer and would fall outside of your estate for Inheritance Tax if you survive 7 years.
We are well placed to be able to help clients understand any existing arrangements they may have in place.