OFFSHORE BONDS AND TAX-FREE SAVINGS ADVICE
When exploring ways to maximise your finances, finding the most appropriate offshore investments is a key factor that can be explored. Contrary to popular belief, offshore investments are not just appropriate for the richest, wealthiest people, but can bring benefits to those with a more modest savings portfolio too.
Offshore bonds are not appropriate for everyone and they can be complex in structure. This is why it is so important to seek unbiased and independent financial advice, as with careful planning and exploration they can present an opportunity to grow your assets in a tax-free way. In addition, offshore bonds come with the benefit of allowing you to choose when any tax liability is due.
INTERNATIONAL FINANCE CENTRES
Knowledge of reducing your tax bill with the help of an ISA or by careful pension planning, are generally better known and understood by savers, who are generally speaking, less aware of how to minimize their tax liabilities through the use of offshore bonds. Like an ISA or pension though, they are also essentially ‘wrappers’ that offer you a viable place to put your investments. Offshore bonds are secured through life insurance companies, which operate from International Finance Centres. Their main benefit is that any underlying investment gains are not taxed at their source. An onshore bond, by comparison, requires you to pay tax on any profits made on your underlying investment. The end result is that your investment has an opportunity to grow at a greater rate with an offshore bond, than it does with an onshore bond.
TAX PAYMENT DEFERRAL
No income tax or Capital Gains Tax will be due on any investments held in an offshore bond wrapper. Furthermore, you can switch between the tax-free funds you invest in at any time. As long as your investment stays offshore there will be no tax to pay, and while you will have to pay tax on any gains made if you make a withdrawal, there are ways to potentially minimize the amount due, which we will be able to advise you on.
Up to 5% of the initial amount you invested can be taken out of your offshore bond annually, for a period of 20 years, without having to pay tax immediately. By deferring to a later date, you can plan better for a change in circumstances and benefit in that sense too – for example, if you are currently a higher rate ta payer, but expect to be a lower rate taxpayer in the future, (for example, during your retirement) it could be worth deferring your tax payments until such a time.
TAX RATE FOR NEW OWNERS
Ownership of an offshore bond (or a part of it) can be transferred as a gift to a new recipient without having to pay any Income Tax. This can, however, have Inheritance Tax implications, should you die within 7 years of the gift being made. Withdrawals made by the new owner will be charged using their tax rate, which can have clear benefits if this is lower than your own. An example where this would be relevant would be if you had a child at university, as their tax rate is going to be significantly less (if any) than your own.
Offshore investment schemes come with their own rules, regulation and guidelines. Furthermore, they are often not as developed as the onshore schemes you will be familiar with in the UK. It is always advisable to seek advice before putting your savings in an offshore bond, so that you can fully understand the implications.
This article does not constitute financial advice and should not be construed as such.