Setting up a fund offshore in a financial centre such as the Bahamas, the Cayman Islands or the British Virgin Islands allows it to attract investors from around the world. Supporters of offshore funds say they are set up in these countries to provide a neutral ground for global trade and investment. Investors put in their money and pay tax where they are a tax resident when they withdraw the cash.
Supporters would also argue that the offshore status of the fund allows it to perform to its full potential. A UK domiciled retail fund is subject to stricter rules about where it can invest. Offshore funds can give investors unlimited access to international markets and stock exchanges. Offshore fund might be denominated in a different currency such as the dollar rather than pounds sterling. This might suit investors who prefer to hold their assets in another currency that they think is more stable than that of their country of residence. Offshore investment bonds are very different to the plain offshore funds. These are investment wrappers set up by life insurance companies in an offshore jurisdiction with a favourable tax regime such as the Isle of Man, Dublin or Luxembourg.
An offshore bond applies the legal and tax advantages of a life assurance policy to an investment portfolio. They are widely used by UK independent financial advisers in tax planning, particularly for clients who have already used up their annual Isa and pension allowances.
Within the wrapper of the offshore bond, you can invest in a wide range of funds covering different types of assets such as equities, fixed interest securities, property and cash deposits.
While the bond is invested you do not pay tax on it and this is known as gross roll up. This allows the investments to grow unhindered by tax, , potentially enhancing the overall return on the investment. Note that depending on the jurisdiction, withholding taxes might apply – most countries require that payers of certain amounts, especially interest, dividends, and royalties, to foreign payees withhold income tax from such payment and pay it to the government. The offshore bond is not taxed on capital gains. Any gains are assessed to income tax in the hand of the bondholder instead of capital gains tax.
You incur income tax at your marginal rate when you take out the capital if you are a UK resident. If, for example, your marginal rate of income tax falls in the future because you have retired, then it could be cheaper to encash at that point.
You can draw down small amounts each year, up to 5% of the amount of the original capital sum, and defer the tax bill on that until the end of the contract. This 5% allowance is cumulative, so if you do not use it one year, you can carry it over to the next.
Being able to take regular amounts without upfront tax can make these useful for structuring a retirement income stream.
Over and above the 5% annual allowance you pay income tax. Offshore bonds are divided into a number of segments, often 100, each of which is regarded as a whole policy in its own right. Whether you encash a whole one or partially can make a difference to the amount of tax your ultimately pay, depending on your individual circumstances.
For more information please contact us.
By Ian Sherlock
