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Time to consider offshore investing? By Nina Montagu-Smith
Offshore investing is often seen as a means for the filthy rich to secrete their millions far away from the Inland Revenue and a place for fraudsters and bank robbers to conceal their lucre. The biggest misconception about offshore Offshore bonds The most popular form of offshore investment is offshore bonds, a wrapper in which you can hold a variety of investment funds such as unit trusts and open-ended investment companies (OEICs). Offshore bonds can be very useful for people who are wealthy and have already exhausted other tax-efficient savings vehicles, such as pension allowances and individual savings account allowances. They are also great for those who are planning to move or retire abroad. Phil Oxenham, offshore marketing executive for AXA (Isle of Man), another provider of offshore bonds, says: "There are many ways to reduce the amount of tax you have to pay when you cash in your bond. For example, you might be a higher-rate taxpayer now but will be retired and paying a lower rate of tax when you encash. Alternatively, you could assign the bond to someone in a lower tax bracket to reduce the tax liability." There are drawbacks as well though, warns Brian Dennehy, of Croydon-based financial adviser Dennehy, Weller & Co: "The most obvious is the higher cost. This product can also be a real double-edged sword. There are tax benefits if you use it in the right way, but you could end up with a huge tax bill if you cash it in at the wrong time or in the wrong way." Paul Ilott, senior investment adviser at Bates Investment Services says: "Tax deferment is the key benefit for investors in offshore bonds and potential investors therefore need to take a view on what their tax position is likely to be when they eventually want to cash in their investment. Ideally, you'd want to be in a position where you won't pay any UK income tax at all." Who should invest offshore? For this reason they offer a natural fit for those people who are planning a new life abroad, perhaps in retirement, as by the time they need to get their hands on the money, they will no longer be living in the UK. Offshore bonds can also work well for people saving for retirement if they know they will be paying a lower rate of tax after they retire. If you are a higher-rate taxpayer when you take out the bond but become a basic-rate taxpayer after retirement, you avoid paying the higher rate of tax on your investment as the bond rolls up free of tax while it's invested. As with onshore bonds, holders of offshore bonds can withdraw 5% of the money placed in the bond at outset tax-free each year, as HM Revenue and Customs considers this to be a 'return of capital'. Offshore bonds are also particularly useful for people with surplus assets, intending to assign them to someone else. By placing the money in an offshore bond which you assign away, you can avoid paying tax at your own rate. This can be a particularly tax-efficient way for wealthy parents to help their children and one example is to take out the bond on behalf of a child and assign it to them when they go to university - this is an increasingly popular choice, which is "probably still not used enough", according to Dennehy, as most students don't pay tax. However, Dennehy adds that even in this scenario, people should probably use up their pension and/or ISA allowances first, before using offshore bonds, meaning that offshore bonds probably suit wealthy investors more. Again, wealthy investors who have incurred capital gains tax (CGT) on other assets can avoid further tax in the same year by sheltering money in an offshore bond. Phil Oxenham adds: "You can keep switching between funds within an offshore bond without incurring CGT. Also, when it comes to completing your self-assessment form, the bond is considered to be one asset, so you just put the value of the bond on the form, not all the individual funds inside it." Finally offshore bonds can come in very handy if you have an inheritance tax (IHT) liability to mitigate. By placing the bond in what is known as a gift trust, it's possible to remove money from your estate, enabling you to pass it on the next generation without incurring any IHT. Many insurance companies will provide the trust 'wrapper' along with the offshore bond. Pick the right bond for you As an all-purpose bond, Brian Dennehy favours the Standard Life International Bond as it has around 50 funds for investors to choose from, from a variety of fund managers - although discounts are only available on the life office's own funds. Paul Ilott is a fan of AXA's offshore bonds - it currently has two bonds - the more general-purpose Evolution bond and the Estate Planning Bond which is essentially the Evolution bond wrapped up in a gift trust to help investors mitigate an IHT liability. One of the key attractions of this range is the range of funds available. It offers a 'starter pack' of around 200 funds to choose from, or, if preferred, a further package allowing a choice from a much wider range of around 6,000 funds in the wider market. However, while these bonds certainly have a number of uses, Mark Dampier, head of research at Hargreaves Lansdown warns that with commissions reaching 8% there's a big incentive for commission-based IFAs to sell them. The tax treatment of offshore bonds The greatest benefit of an offshore bond is the ability to roll up investment growth within it free of income or capital gains tax - also known as 'gross roll-up'. This compares with onshore investments which are automatically taxed at 20% a year, and higher-rate taxpayers must pay the extra 20% via their self-assessment forms to make this up to 40%. However, Brian Dennehy warns that the benefits of gross roll-up are likely to be cancelled out initially by the effect of higher charges. He claims it takes on average eight to nine years for the benefits of gross roll-up to outweigh the effect of higher charges so don't encash your bond too early.
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