How offshore bonds offer you tax-free growth

ARE you so fed up with Brexit and squabbling politicians that you have decided to head abroad for the rest of the summer?

Good decision – especially if the vision of soaking up the sun beside the hotel pool sparks thoughts about offshore bonds.

The most common form are investment bonds offered by offshore branches of British life assurance companies via a taxefficient wrapper. Almost anyone will benefit who currently pays higher-rate income tax but who is likely to be paying tax at a lower rate in the future.

The classic scenario is a higherrate taxpayer saving for retirement at which point they know they will become a basic rate taxpayer. Rather than pay higher rate tax now on the investment, it grows with gross roll-up, free of tax, and can be cashed in with only basic rate tax to pay.

Offshore bonds can also be an excellent way of investing a lump sum to pay for a child’s university education. Parents or grandparents can take out the bond – and then assign all or part to the child when it’s needed.

Most students are non-taxpayers, so there would be no tax to pay on encashment.

A UK citizen who is currently working full-time abroad but who intends to return to Britain can also take advantage.

Growth accrued in the offshore bond during the period of residence overseas is not liable to UK income tax on encashment.

Finally, offshore bonds can mitigate against inheritance tax – now pulling in £5.37 billion annually, which is up 58 per cent in the last five years.

By placing the bond in trust, it’s possible to remove money from your estate, enabling you to pass it on to the next generation without incurring any IHT.

In short, offshore bonds offer tax-free growth and tax efficiency, simplicity, flexibility and allow clients to stay in control of their money even if it is intended for others such as their children.

Courtesy of Old Mutual Wealth there is an example of saving early for your child’s university fees:

John is a higher rate taxpayer, has used all his allowances but has a lump sum of £60,000 that he would like to invest on behalf of daughter Eve, who is likely to want to go to university in 10 years’ time.

Over the period, the offshore bond will benefit from gross roll-up – and John will not need to declare the details on his annual tax return, simplifying reporting.

When it’s time for Eve to enter further education, because she is likely to be a non-taxpayer, offshore bonds become extremely attractive as segments can be assigned potentially free of income tax.

This is how it works:

Each time John passes money to Eve, by way of a gift assignment and subsequent surrender by Eve, the gain needs to be calculated (the value of the segments being assigned on surrender, less the original value of the segments).

If the gain is below Eve’s personal allowances then she will not have to pay any income tax.

Eve will have access to her personal allowance, the zero per cent starting rate tax band for savings and the personal savings allowance.

As John has not surrendered the policy segments, he does not have anything to report on his tax return. It is also unlikely that Eve will need to report anything on her tax return unless the gain is significant (in excess of £10,000).

With the average first-time buyer deposit and cost of going to university reaching unprecedented levels, it’s easy to see why a growing number of parents and grandparents feel the need to save to help the next generation.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice