An offshore portfolio bond is a tax efficient wrapper that can hold a variety of assets like stocks and shares or mutual funds. This is a bond that adds the legal and tax shield of a life insurance policy to an investment portfolio. It is structured to simply combine a life insurance policy and a portfolio to create a wrapper that investors can buy, manage and sell their assets through. The British (or onshore) equivalent is called an ‘open ended investment company’ (OEIC). Although many OEICs are shared, some are private to an individual and thus a good comparison to Offshore Portfolio Bonds.
Find out about how you can invest in an Offshore Portfolio Bond by getting in touch with a recommended financial adviser.
The specific benefits of investing in offshore bonds depend upon your individual circumstances. The investment funds held within offshore bonds grow free of year-on-year taxation, unlike comparable OEICs, which are taxed annually on capital growth. Some of the individual funds within an Offshore Bond may be subject to withholding tax. your financial adviser will be able to tell you if it’s worth avoiding these.
You won't be liable for capital gains tax when you sell a profitable fund to purchase another fund within your offshore portfolio bond. If you made the same switches within an OEIC, or your equity or unit trust investments outside a portfolio bond, you may be liable for capital gains tax. This is one way that offshore bonds are often a more tax-efficient way for you to invest.
Offshore bonds are designed to be flexible, especially with regards to letting you take ad-hoc withdrawals, or set up an income stream into an offshore bank account with a cheque book, internet banking and credit card attached.
Another major benefit is the ability to transfer in and consolidate all your existing stocks, mutual fund and other investments. This gives them the tax efficiency and ease of administration of the other assets within the portfolio bond.
Income payments from OEICs are charged at your standard income tax rate and capital gains are charged at the standard 18%. Much of the growth in OEICs are contributed from income payments, not capital gains, so a lot of your growth will be swallowed by HMRC.
Offshore bonds offer regular withdrawals, that give you access to your capital in the most tax-efficient way by withdrawing up to five percent of each investment amount every year as tax-deferred 'income'. This five percent amount can be taken every year for 20 years, or built up over a number of years and withdrawn less frequently without triggering a 'chargeable event' for tax purposes (a 'chargeable event' occurs, for example, when you take out more than five percent a year, or you cash in your bond in full, triggering an income tax charge).
Tax deferral is an important feature of offshore bonds. This lets you choose when to pay tax, as this will be when you cash in some, or all, of your bond. The tax payable on a chargeable event will depend on your highest marginal rate at that time. This allows you to put off such an event until you're either no longer a taxpayer or have moved from being a higher rate taxpayer to a lower or basic rate taxpayer or have moved to a country with lower taxes. You should bear in mind that if you do move to a different jurisdiction, the benefit of tax deferral may be lost. All of these factors will be taken into account by your financial adviser.
Wrapping your offshore portfolio bond in trust means you can offset or wholly mitigate taxes due when transferring wealth. If you have any assets above the inheritance tax nil rate band (the threshold above which inheritance tax applies) that aren't held in trust, they may be liable for inheritance tax at 40 percent. Also, an offshore bond or trust can be structured to allow you access to the funds while you are still alive. Please refer to our full article on How to Pass on Your Wealth.
Since offshore bonds are 'non-income producing assets', there's nothing for you to report to the HMRC until a chargeable event. You don't have to include any information on your tax return before this point, compared with the potentially complicated requirements for reporting income and gains on a portfolio of unit trusts or shares. When you do need to include information on your tax return under self-assessment, it's also generally much simpler to report a chargeable event gain from an offshore bond than the income from an OEIC; your financial adviser will be able to prepare a full tax report for you to submit.
Your offshore portfolio bond gives you an easy way to manage all of your investments; the financial institution will take care of all administration associated with funds, stocks and fixed income bonds. You will have a clearly defined, easily laid out structure that can be viewed holistically, simplifying and streamlining your financial life.
However, there are a host of factors your financial adviser will have to consider when choosing the most appropriate investments:
- The amount you have to invest
- The term of your investment
- The likely rate of inflation during the term
- Your income tax rate, both over the term and on maturity
- Your residence during the investment, and on maturity
- Whether you intend to switch funds, and how often
- Charges and costs
- Ratios of equities to other asset classes within your bond
- The likely growth and income yield on these assets
Due to all of these factors and the complexity involved in properly and objectively assessing them, specialist advice is necessary.