Making allowances for offshore bonds

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1 Sharing our expertise Making allowances for offshore bonds For adviser use only. Not for use with customers.

2 The benefits of the 5% withdrawal allowance Many UK expatriates who intend to move back to the UK at some point in the future may find the benefits of offshore portfolio bonds extremely attractive for their future financial planning needs. One such benefit is the option to take withdrawals of up to 5% of the bond premium each year, for 20 years without an immediate liability to tax. This fact sheet will examine some of the main planning opportunities it offers those who are likely to return to the UK in the future. One point to make clear is that the allowance is tax deferred, rather than tax free. On final policy encashment, all previous withdrawals are accounted for when calculating the overall policy gain. If the 5% withdrawal allowance is not taken in any policy year, the unused allowance can be carried forward on a cumulative basis. Planning opportunities In this era of very low interest rates the 5% allowance is equivalent to a gross yield of 8.33% p.a. and 10% p.a. for a high rate taxpayer and an additional rate taxpayer respectively. Some clients may be attracted to this simply because it can offer them a fixed income in retirement, which is not immediately subject to tax. This has the benefit of the income not needing to be be accounted for in annual self assessment returns to HM Revenue and Customs. Some other situations where the allowance can be used very effectively are featured as follows: 1 Where an individual is an additional or higher rate taxpayer on returning to the UK, and is likely to fall into a lower tax band in the future. As any tax is deferred until the offshore bond (or individual segments) is encashed, the tax can be paid when the individual has fallen into a lower tax band. 2 Where an individual requires income on returning to the UK temporarily but intends to emigrate permanently from the UK in the future. A tax deferred income can be taken in the UK, with tax eventually being paid after emigrating when the policies are encashed. The new jurisdiction may have a more favourable system than the UK for taxing policy surrenders. 3 By assigning policies to another individual (aged 18 or over). A policy assignment is not a chargeable event (as long as the assignment is not for money or money s worth) and therefore no immediate tax charge arises. The case study one on the next page examines this further. 4 Reduced personal allowance Since 6th April 2010, a person s entitlement to the basic personal allowance ( 8, /16) has been reduced by 1 for every 2 of adjusted net income over 100,000. When this reaches 121,200 the personal allowance is completely withdrawn. When investments are wrapped within an offshore bond the 5% annual withdrawal allowance can provide a tax efficient income stream and also keep adjusted net income below 100,000, thus preserving the personal allowance. See Case Study two on the next page. 5 Withdrawing large amounts using the cumulative allowance For individuals looking to withdraw large amounts in the future, the cumulative 5% allowance can be a valuable feature. Any unused withdrawal allowance from previous policy years can be carried forward, allowing larger withdrawals to be taken on a tax deferred basis. For example, where no previous withdrawals have been taken this could allow for 50% of the premium amount to be withdrawn in policy year 10 without an immediate liability to tax. Using the allowance in this way may be useful for investors who do not need regular income, but may have a need to access capital on an ad hoc basis. This could be a tax efficient way of accessing capital, particularly for investors who expect to be in a lower tax band when they surrender policies. 2 Friends Provident International Making allowances for offshore bonds

3 Case study one Dave is 64 and approaching retirement. He holds an offshore bond in which he invested 500,000 several years ago while working as an executive in Hong Kong. He also has a UK SIPP worth 450,000 and a defined benefits pension from a previous UK employer which will pay him a pension of 30,000 p.a. He does not wish to crystallise his SIPP on retirement because he knows that whilst it remains uncrystallised up to age 75, any lump sum death benefits paid to the SIPP beneficiaries will not be subject to the 55% recovery charge on death. Therefore Dave decides to use his offshore bond to supplement his defined benefit and state pension. He uses the 5% withdrawal allowance ( 25,000 p.a.) to provide him with a regular tax deferred income between the age of 65 and 75. Because the withdrawals he takes from the bond are tax deferred, this ensures that he remains a basic rate tax payer during this period. When Dave reaches 75 he crystallises his SIPP and goes into income drawdown. At this point he also assigns the offshore bond to his wife Dawn (an exempt gift for IHT under the spousal exemption) whose only income is the basic state pension. She then encashes the policies; it is at this point that the tax is effectively paid on the 5% withdrawals which Dave has taken. Because Dawn is now the legal owner of the policies, tax will be paid at her lower rates of tax compared with Dave s Case study two After living overseas for the last 15 years Linda, aged 49, decides to move back to the UK to take up a position as a regional manager for a large travel company, earning a salary of 90,000. During her time spent working overseas, which was split between Hong Kong and Dubai, Linda inherited 750,000 as the sole beneficiary of her late mother s estate. On the advice of her IFA at the time, she invested the inheritance in a bond. The investments held within the bond a regenerating investment income of 33,750 p.a. (approximately 4.5%) If these investments had been invested in the assets directly by Linda, it would have meant that her adjusted net income would be 123,750, which would result in her losing her entire personal income tax allowance. However, because they are held within an offshore bond, where all of the income and gains roll up gross and without being subject to immediate taxation, it means that her annual taxable income remains solely her 90,000 salary. The offshore bond has therefore preserved Linda s full personal allowance each year. The 5% withdrawal allowance is not panacea; it must be remembered that it is a tax deferred, rather than tax free allowance. However, it still remains a valuable benefit and should not be over looked during this low interest rate and high taxation era. 3

4 Important information The information given in this document is based on Friends Provident International Limited s understanding of UK and Isle of Man tax law and HM Revenue & Customs practice as at September 2015, whichmay change in the future. Individuals are advised toseek professional independent advice and no liability can be accepted for the personal tax consequences of this Trust or for the effect of future tax and legislative changes. Investment involves risk and each class of investment will involve its own individual level of risk. We recommend that you discuss specific risks associated with individual investments with your clients before making any investment decisions. Fund prices may go up and down depending upon the underlying investment performance or, where investments held within a fund are not denominated in the currency of that fund, simply because of movements in currency exchange rates. Each policy is governed by and shall be construed in accordance with the law of the Isle of Man. If your client effects a policy whilst resident in the United Arab Emirates, all disputes regarding the policy shall be subject to the on-exclusive jurisdiction of the courts of the United Arab Emirates. Some telephone communications with the Company are recorded and may be randomly monitored or intruded into. All policyholders will receive the protection of the Life Assurance (Compensation of Policyholders) Regulations 1991 of the Isle of Man, wherever their place of residence. Investors should be aware that specific investor protection and compensation schemes that may exist in relation to collective investments and deposits accounts are unlikely to apply in the event of failure of such an investment held within insurance contracts. Complaints we cannot settle can be referred to the Financial Services Ombudsman Scheme for the Isle of Man. 4 Friends Provident International Making allowances for offshore bonds

5 This factsheet is intended for general information purposes only and does not constitute legal advice. It is based upon our understanding of current UK legislation as at September 2015 and may be subject to change in future. Whilst every care has been taken to ensure the accuracy of this factsheet, Friends Provident International Limited cannot accept any liability to any party for loss or damage caused by errors or omissions. No part of this factsheet may be reproduced without prior approval from Friends Provident International Limited. Copyright 2015 Friends Provident International Limited. All rights reserved. Release date: September 2015 Friends Provident International Limited: Registered and Head Office: Royal Court, Castletown, Isle of Man, British Isles, IM9 1RA. Telephone: +44(0) Fax: +44(0) Website: Incorporated company limited by shares. Registered in the Isle of Man, number Authorised by the Isle of Man Insurance and Pensions Authority. Provider of life assurance and investment products. Authorised by the Insurance Authority of Hong Kong to conduct long-term insurance business in Hong Kong. Registered in the United Arab Emirates as an insurance company (Registration No. 76). Registered with the Ministry of Economy as a foreign company (Registration No. 2013): Registration date 19 April Authorised by the United Arab Emirates Insurance Authority to conduct life assurance and funds accumulation operations. Registered in Singapore No. F06835G. Licensed by the Monetary Authority of Singapore to conduct life insurance business in Singapore. Friends Provident International is a registered trade mark of the Aviva group. XIM_TA_WITHDRAWAL 09.15