Offshore bonds get £5k tax free savings boost

29th April 2015

Offshore bonds have been given a double tax boost. Changes to how savings income is taxed will mean a greater number of offshore bond savers will pay no tax on their bond gains.

The twin measures will first see the savings rate tax band extended to £5,000 and the tax rate cut from 10% to zero from April 2015. And from the following April, a further £1,000 may be taken tax free under the new personal savings allowance. Which would mean that in total someone with no other income could realise gains of £15,600 from an offshore bond tax free in 2015/16 and £16,800 from 2016/17.

Who gets it?
These changes only apply to savings income. This includes interest from banks, building societies and non- equity unit trusts/OEICs, as well as gains from offshore bonds. It doesn’t apply to dividends or gains from onshore bonds.

Crucially, the tax free savings rate band is removed where someone has earned income of more than £15,600. This includes pension income in addition to salary or self-employed profits.

To get the most of the tax free allowances may require careful planning and timing. This is where the unique features of an offshore bond can aid tax planning, especially where a client is able to manipulate their income or where the bond (or segments of it) can be assigned to a non-taxpayer.

Income and gains within an offshore bond roll up gross within the tax wrapper and only become taxable when there’s a chargeable event. Tax deferral can be extremely attractive to those who pay tax at the higher rates. This is especially true should they expect to become basic or non-taxpayers in the future, perhaps in retirement.

Timing these chargeable events to coincide with a year in which little or no other income is taken can mean that any gains escape tax completely. And the new pension freedoms will see a greater number of people able to turn their retirement income on and off when they need to.

Bridging the retirement income gap
Some retirement incomes aren’t as flexible. State pensions and benefits from final salary schemes, for example, once in payment will pay a fixed amount for life and cannot be stopped and restarted. And these can eat into the tax free allowance for a persons savings income.

But there can be a window of opportunity before any fixed incomes commence. And using the bond like a bridging pension can have benefits.

Deferring State or Final Salary pensions can create tax years where no income is being taken. Surrendering part of the offshore bond to realise any accumulated gains can replace the lost income. If that chargeable gain falls within the combined personal allowance and savings rate band, then the gain will escape tax. And in addition, deferring both Final Salary & State pension will mean that the fixed income you eventually receive will have increased.

Not everyone will be able to defer their retirement income to get gains out tax free. But it may be possible to assign the bond to someone who pays tax at a lower rate.

Assigning the bond or individual segments will shift the taxation onto the new policy owner. This can be a valuable planning opportunity for spouses and civil partners especially if the new owner may be a non-taxpayer.

Also it can be a great way of helping with a child’s or grandchild’s university fees.

Bond segments can be assigned to the student who is likely to be a non-taxpayer if they’re in full time education. Provided gains are kept within the £15,600 allowance, they won’t be taxed.

Over a three year course, that’s up to £46,800 in chargeable gains which can be taken free of tax. That’s an extra £13,500 compared to the equivalent CGT tax free allowance (£11,100 2015/16).

And remember, the proceeds received could be much more than the gains made, potentially providing the student with more than enough to pay their way through university.

More to come….
The Budget announced the introduction of a personal savings allowance from 6 April 2016. Unlike the savings rate band where only those with little or no earned income can benefit, the allowance is only removed once income from all sources exceeds £150,000. This means everyone who isn’t an additional rate taxpayer will receive some of the interest from their savings tax free.

The first £1,000 savings interest will be tax free. This amount reduces to £500 for higher rate taxpayers. That means £40,000 on deposit and earning 2.5% a year will be tax free for a basic rate taxpayer saving them £200 in income tax. A higher rate taxpayer would be able to hold £20,000 on deposit in the same account and the tax saving will be the same.

But it also means that most offshore bond savers will get some of their gains tax free. And in essence it increases the amount that can be withdrawn each year without incurring a tax charge. In addition to the 5% withdrawals, a basic rate taxpayer could take a further £1,000 without paying any tax on the withdrawal.

Offshore bond withdrawal errors may be reversible

13th April 2015


According to an article in the trade magazine ‘International Adviser’ on 9th April by Richard Hubbard, savers who inadvertently incur a heavy tax bill by drawing down funds from an offshore bond in a tax inefficient manner may be able to apply to the courts to reverse their decision, according to a recent legal decision.

In the ruling on a case known as Lobler vs. HMRC,  the court decided that if the mistake was sufficiently serious it could put the individual back to the same position they would have been in had the most efficient withdrawal method been selected originally.

“The ruling could make it possible, where circumstances allow, for those individuals to rectify a mistake which has cost them tens of thousands in tax,” said Rachael Griffin, financial planning expert at Old Mutual Wealth.

“It is also possible this ruling in the Upper Tribunal could pave the way for a change in the chargeable event legislation,” she said.

The ruling applies to both onshore and offshore bonds, which are collectively known as investment bonds, and will really only be useful where large sums are involved.

Investment bonds are generally issued as a cluster of individual contracts, and savers can usually withdraw up to 5% of the original investment tax deferred each policy year for up to 20 years, which effectively allows for a return of capital. Withdrawals over 5% can be taken in a policy year but this may be taxable.

The withdrawals can be made in one of two ways: withdrawing across each of the individual policies (part surrender); or selling one or more of the individual policies in order to reach the value of the withdrawal required.

In the Lobler case the saver decided, without taking financial advice, to withdraw his money from his Zurich Life investment bond in two large lump sums using the partial surrender option, incurring a huge tax bill.

In our opinion, it is crucial that investors are fully aware of all potential options for withdrawing monies from offshore and onshore bonds and they need to understand any potential tax consequences of the various options, so as to make an informed decision on the option they finally decide to choose.

Taking professional advice from ourselves at Mark Dean Wealth Management ensures individual’s take withdrawals from an investment bond in the most tax efficient manner possible. However, it is not uncommon for customers to process a surrender themselves and inadvertently create an unnecessary tax liability.

Non-Dom Tax Status under Scrutiny

8th April 2015

The Labour Party have announced today that they intend to overhaul the UK Resident Non-Domicile Regime if they win the next general election.

The announcement places the UK Res Non-Dom debate right at the heart of the General Election and “tax fairness”. It is unclear what the final proposals are and the speeches of the Labour Leader and the Shadow Chancellor have shed limited light on this. We suspect this is deliberate as they will need to work out the detail and also gauge reaction from the City as well as the public. That said, the brief proposals are the most radical that have ever been proposed and threaten London’s position as a financial centre. It will already mean clients potentially coming to the UK will need to consider deferring until after the General Election on 7th May and those already here plan for an exit with a potential 2 year window following the election of a Labour Government.

UK resident but non-UK domiciled individuals have, for many years, enjoyed a beneficial tax position in the UK. Under the current system, those that are resident (i.e. living) in the UK, but not UK domiciled, can elect to be taxed in the UK under the remittance basis of taxation. This enables such individuals to pay UK tax on their UK source income and gains and only on their foreign source income and gains that are “remitted” into the UK, but unlike those resident and domiciled in the UK, they can legitimately avoid paying UK tax on their foreign income and gains kept offshore.

The proposals put forward so far are:

•The Non-Dom UK tax rules will be abolished (and anyone permanently residing in the UK would be liable to pay UK tax on their worldwide income and gains, but this needs to be clarified);
•There will be a new rule for temporary residents (persons who are only resident in the UK for a short period, such as people seconded to the UK on business or to study), so that they would only be taxed on their UK source income and gains. This “temporary period” will be the subject of a consultation but is expected to be up to 4 or 5 years; and there would be a “transition period” of 2 years to allow UK Res Non-Doms to organise their affairs.

The scope of the proposals will need to be confirmed, however, once the election is over and any legislation published in draft. It may be that  Labour’s announcements will be tempered slightly and they will seek to make radical changes to the UK Res Non-Dom Regime similar to those brought about by the former Labour Government in 2008.

In the 2007 pre-Budget Report, the former Labour Government announced a number of significant tax changes to the UK Res Non-Dom Regime, many of which were enacted the following year in the Finance Act 2008.  The Finance Act 2008 saw the introduction of the remittance basis charge, changes to the remittance basis rules (and the meaning of “remittance”) and changes to the UK taxation of offshore trusts (where previously UK Res Non-Doms could roll up gains in offshore trust structures free of any charge to UK tax).

However, there were a number of other proposals which had been put forward which were either watered down or abandoned during the parliamentary process and it remains to be seen whether or not these measures will be raised by Labour again (if it does not completely overhaul the UK Res Non-Dom Regime) or picked up by other political parties.

For example, the original draft legislation of the Finance Act 2008 had contained notification rules whereby a UK resident but non-UK domiciled individual who had contributed funds to an offshore trust would have been required to notify the UK Revenue of the trust, even though this information may not have been directly relevant to a UK tax liability.

Another possible measure which could be introduced is a “deemed domicile” rule (similar to that for inheritance tax) where long term UK Res Non-Doms will lose the right to the remittance basis after a period of time. Under the current “deemed domicile” rules, which only applies to UK inheritance tax, UK Res Non-Doms who have lived in the UK for 17 out of the last 20 UK tax years are subject to UK inheritance tax on their worldwide estate (whereas UK Res Non-Doms who are UK resident for a shorter period of time are only subject to UK inheritance tax on their UK estate).