Bonds – Onshore and Offshore Investment, Pension and Taxation

Onshore Bonds

An investment bond is technically a single premium life assurance contract although the life cover aspect is only nominal. Bonds are collective investments in which the investments of many individual investors are pooled together. This pooling enables relatively small investors to benefit from the economies of scale made available to institutional fund managers.
A wide choice of managed, general and specialist funds are available offering investment opportunities in equities, property and fixed interest securities. Bonds enjoy the facility to switch between these internal insurance company funds at a reasonable cost if desired. Although classed as single premium investments, 'top up' facilities are offered for further amounts to be invested either on a regular or ad hoc basis.
Please be aware that past performance is not a guide to future performance and the value of investments can go down as well as up. You may not get back the amount you invested.

There are basically two types of Onshore Investment Bond:

1. Unit Linked - These Contracts offer a wide choice of funds, often with a choice of Investment Managers. The facility to switch between funds and Fund Managers is often available without administrative charge.

2. With-Profits Bond - For the Investor requiring a lower rate of risk, the With-Profits Bond can offer an attractive proposition. The capital is largely protected against stock market swings. The returns to the Policyholder are smoothed by the Life Company Actuary to give a steady growing return. Whilst a Unit Linked Investment Bond is likely to deliver a larger return over the longer term, the With-Profits Bond serves as a useful compromise between full market exposure and deposit based investment. There is a large choice of such Bonds available, and expert advice on the choice of the Company is essential.

Taxation

The underlying funds of Investment Bonds are subject to tax on income and gains. Any 'income' you need is achieved by selling units. It is most likely to be in your best interest to defer taking income from the bond for at least the first 12 months.
Current legislation allows 5% of the capital to be withdrawn for up to 20 years with no immediate liability to tax. Withdrawals in excess of 5% are only taxable if they take you into the higher rate tax band.

Offshore Investment

Many offshore funds are operated by subsidiaries of well-known onshore institutions. Such funds are able to offer a wider range of investments than their onshore counterparts owing to the differing regulation offshore. Different types of regulation can mean less security but the very diverse nature of the offshore market means that generalisation can be misleading. As professional Independent Financial Advisers, we can identify well-run investments that make the most of the tax advantages that offshore regimes have to offer. Income distributing funds pay their income gross which is particularly attractive to non-taxpayers.

If the investment is a unit-linked one, its value can reduce in direct relation to the stock market prices of its underlying assets, although it can also rise. This means you may not get back all the money you invested.

If it is a with-profit arrangement, there is not the same direct link between the underlying assets and the value of your policy. This is because the insurance company holds back some profit from good years to offset losses in poor ones – this is referred to as smoothing.

An offshore investment is one which is held, literally, offshore, i.e. not under United Kingdom jurisdiction. If you invest in an ‘onshore’ bond then the fund manager will be liable to pay certain UK taxes on the underlying fund, which as well as being non-reclaimable, will also hold back the growth of your investment. An ‘offshore’ bond is liable for no UK tax and therefore grows virtually tax-free at a potentially higher rate.

That is not to say that you can necessarily avoid paying UK tax. You may still find you will have to pay some but, with careful planning, you can control when you pay.

Of course if you are living abroad currently, or you plan to move abroad during the life of your investment, you may well object to paying UK-based taxes, especially as these are non-recoverable, and therefore an offshore bond enables you to invest without any liability to UK taxes.

Offshore investment bonds do not generate income and hence generate no UK tax liability until the proceeds are brought back onshore.

Offshore Bond Taxation

Unlike their onshore equivalents, offshore bonds do not pay corporation tax on income and gains within the fund, although withholding tax on dividends is not reclaimable. This 'gross roll up' of income and gains generally has the effect of causing the fund to grow more quickly than an onshore fund. Income withdrawals are achieved by selling units. Provided annual withdrawals do not exceed 5% of the initial investment, no liability to tax will arise until the bond is encashed in full, thus providing an important tax deferral opportunity. Withdrawals in excess of 5% per annum are liable to UK Income Tax at your highest rate as is the overall gain on final encashment. On final encashment any 'gain' in the value of the Investment Bond, taking into account any previous withdrawals, is added on to your income and is subject to tax in the normal way. There is relief for any period you are resident outside the UK.

We offer an extremely competitive service, so for more information regarding Onshore or Offshore Investments contact us on:

Telephone: 0115 945 5199   Fax: 0115 982 6250
Between 8.30am and 5.30pm Monday to Friday to discuss your requirements.

E.mail: info@davidburnell.co.uk
and we will find a cost effective solution for you.

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David Burnell Financial Services Ltd
1 Albert Road, West Bridgford, Nottingham, NG2 5GS

Tel: 0115 945 5199   Fax: 0115 982 6250
Email: info@davidburnell.co.uk

David Burnell Financial Services Limited is an appointed representative of IN Partnership the trading name of The On-Line Partnership Limited
which is authorised and regulated by the Financial Services Authority.

Registered Office 29 Arboretum Street, Nottingham NG1 4JA. Registered in England, Company Number 4619997
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