Wealth management: offshore's not offlimits

Investing offshore is often seen as the preserve of the very wealthy, but offshore investment can provide valuable benefits for all types of investor.

Investments are held within a ‘wrapper’, usually an offshore investment bond which is registered in one of a variety of jurisdictions, such as Jersey, Ireland or the Isle of Man. These monies are able to grow with little or no tax deducted within the fund. Tax only becomes payable once the monies are remitted back to the UK. This benefit, known as ‘gross roll up’, provides greater compound returns for investors.

Investors can benefit from the withdrawal facility that an offshore bond provides, which enables them to draw an annual income of up to 5% of the initial investment on a tax deferred basis. This is not deemed as income per se for tax purposes, but rather as a return of capital. This means that an investor can make this withdrawal for up to 20 years before a ‘chargeable event’ is deemed to have occurred and tax becomes payable.

A bond can also be used as part of a tax planning strategy through the use of trusts and bond segmentation. Packaged ‘Discounted Gift Trusts’ are available to cater for those who want to gift capital to beneficiaries, but still wish to receive an income from the assets during their lifetime. This allows individuals to make a gift for IHT purposes, but the value of that gift is immediately discounted or reduced.

An offshore bond can be segmented, allowing the investor to assign portions of the bond across to another individual as a gift. If they then choose to cash the bond, the proceeds are liable for tax based on their own tax position. This could result in only basic rate tax rather than higher rate tax being levied on the proceeds. This segmentation facility also ensures that the investment make-up of the bond is not disturbed.

Investors can typically invest across a wider range of unit trusts and open-ended investment companies and can access offshore deposit accounts and alternative investments such as hedge funds.

But under new capital gains tax rules gains made on offshore bonds are liable to income tax, which is obviously levied at a higher rate than CGT, which is the tax that would be levied on, for example, unit trusts and investment trusts.

Chris Harrington is a financial planning consultant at Cowgill Holloway