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Tax Matters: How offshore bonds can address tax liabilities

Tax Matters: How offshore bonds can address tax liabilities

They are a tax wrapper of last resort for most advisers, however, in the right circumstances, these bonds can be a useful way for clients to mitigate against tax liability.

How useful are offshore bonds? Well it depends on the individual client. And, perhaps, how big their family is.

Tax tactics

The most obvious use for offshore bonds for planners is as a tax wrapper of last resort. For a wealthy client, once they have expended pension allowances, ISAs, and so on, an offshore bond can be an option for tax planning.

In technical terms, an offshore single premium investment bond is what the taxman calls a non-qualifying policy, which can be written on either a life (whole of life) assurance or a capital redemption basis.

There are a couple of other important factors when it comes to capital gains tax (CGT) or inheritance tax mitigation strategies.

Assigning an offshore bond to an individual over 18 does not trigger a chargeable income tax event, unless it is for money or money’s worth (a benefit of direct monetary value to an employee).

It is not a disposal for CGT purposes.

Offshore in action

Offshore bonds can be useful for clients, probably very wealthy clients, looking to ‘wash out’ some tax liability, but it only works if the client already has an offshore bond.

The planning opportunity for those who do have one is to reassign it to another generation.

If the client has an offshore bond and a substantial gain that, if realised, would result in a high tax charge, the offshore bond can be reassigned to a younger member of the family.

Most single premium offshore bonds are issued containing a number of mini policies within them. These are also called segments or sub-policies and there are normally 100. The investment is spread across these segments.

This bit of planning works best if there are several family members as the bond can be divided among them in tranches or segments. Each tranche uses each person’s personal allowance.

Obviously this works best with big families and people with multiple grandchildren. But the planner who explained this use to me had a client who had exactly that! Such is the way.

Potential flaw

What is the downside? As usual, there is a chance HM Revenue & Customs may chafe the rules with some sort of retrospective effect.

But it is an interesting option when used in the right situation.Will robins

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