Investment Bonds - Onshore or Offshore

These are taxed in a unique manner and can protect against higher rate taxation immediately whilst providing regular withdrawals if required of up to 5% per annum for up to 20 years without an immediate tax liability. Higher rate tax is delayed until final encashment whenever that may be at which time the investor may always assign the policy to a spouse who might not be subject to HR tax. Alternatively, if the investor has moved to a more tax friendly country in retirement the eventual tax may be avoided altogether. The underlying investment may include deposit accounts, and most onshore Unit Trusts/OEIC’s, Investment Trusts, and offshore collective funds depending upon the ‘Bond’ provider selected.

It is possible with correct tax planning to provide extremely high levels of ‘Income’ now without immediately paying 40% or the proposed 20010/11 50% tax rate.

Positive Salient Points

• Protects the investor from higher rates of taxation whilst Bond is retained
• Regular withdrawals of a up to a cumulative 5% per annum for up to 20 years available without immediate liability to personal tax
• Underlying investments are largely at the investors choice and risk tolerance within a large range of collective investment funds including deposit and fixed interest funds
• An interaction between spouses/civil partners is possible on final encashment if this is tax favourable
• Bonds may be split into many segments to provide greater tax flexibility

Negative Salient Points

• Care must be taken in Offshore Bond provider selection as costs may be higher than onshore bonds
• Onshore Bonds pay tax at source in place of basic rate tax and non taxpayers will be unable to reclaim this
• Depending upon the bonds selected there may be a discontinuance charge during the 1st 5 years on full or partial redemption – this is normally tapered and reduced each year

Onshore bonds - Taxation

Onshore bonds are taxed internally at the special Insurance Company rate that allows for indexation on capital gains so that only real gains are taxed. After, indexation is allowed all income and gains earned by the bond fund are taxed at 20%. On final encashment or for regular withdrawals in excess of a cumulative 5% per annum there is potential for a tax charge to the investor if the average yearly gain takes the taxpayer into 'Higher' rates of tax. For example a 40% taxpayer could face a 20% charge on the gain and a 50% taxpayer might have a 30% liability. There are a number of ways of avoiding this deferred taxation including a process known as top slicing that could be of particular use to the marginal higher rate taxpayer - we would be happy to provide specific details on request.

Offshore Bonds - Taxation

Offshore funds are not taxed internally and thus the investor has the advantage of gross build up of capital gain and income. The 5% withdrawal allowance is retained but on final encashment or withdrawals in excess of 5% per annum taxation is charges at the investors full tax rate. This assumes that the investor remains a UK taxpayer. We are happy to explain the advantages/disadvantages of either investment type here.