Offshore Bonds &
Locally Compliant
Tax Wrappers
Offshore bonds can provide significant tax benefits for overseas residents, including British expats planning a return to the UK in the future.
Locally-compliant bonds have also been designed for residents of Spain, France and Portugal, with benefits ranging from gross roll-up to protection against succession taxes for beneficiaries.
Offshore bonds also enable you to assign segments of your portfolio to others and take advantage of time apportionment relief to reduce your tax bill.
Do you need an offshore bond?
Offshore bonds have been the go-to option for many expat advisors for years, and although they can be a useful tax-efficient investment vehicle when used correctly, restrictions on liquidity and high charges can easily cancel out the benefits when an investment platforms could have been used instead.
A detailed understanding of how offshore bonds work is key. Investment platforms tend to be advanced technologically and easier to use, but there are still locations where tax advantages of offshore bonds should not be ignored.
British expats can also benefit from using offshore bonds if they return to the UK. Before returning, the bond should be 'endorsed', and you'll then be entitled to an annual 5% tax-deferred income, in addition to an initial lump sum equal to 5% for every year the bond has been in force. This annual 5% allowance is taken from the initial invested capital over 20 years until it is exhausted, (ie. 5% x 20 years = 100%). The remaining funds will be then be taxed at marginal rates.
Paying for your bond
It is critical to understand how you pay for a bond as they are often sold more for the commission on offer than the product's benefits. Fixed charging periods of 5, 8 or 10 years may apply and it's these structures that limit flexibility in early years and can result in substantial exit fees.
When using these structures, the charges are measured against the initial invested capital and not the value, so if poor fund performance or withdrawals takes the balance below what you invested, you'll be paying charges on funds that do not exist.
Using the example of a £100,000 investment paying 1% pa (£1,000) in fixed fees over 10 years, if you then withdrew £50,000 and halved the balance, you'll still pay a charge of £1,000 pa, effectively doubling the fees as a percentage.
Further, if you closed the bond after a period of (for example) 6 years, you will incur an exit fee equivalent to 1% pa for each year of the 10 you have not used (ie. 4 years x 1% = 4%). This is owing to the financial adviser taking 7%-8% initial commission from the bond provider at the outset, which needs to be paid back by the client.
Quarterly administration fees of up to £150 also apply which makes it vital to understand if the fiscal benefits outweigh the product costs, especially for smaller investments.
How bonds can work for you
With the right advisor, bonds are set up in a pro-investor way and provide benefits that other investment platforms cannot. In locations such as Spain, Portugal and France, locally compliant bonds can significantly reduce the tax you pay whilst also completing tax reporting for you and reducing succession taxes when you die.
Remember
If you are recommended an offshore bond, be sure it is without fixed charging structures, on a fee-only basis and check you can access funds without penalties.
Get in touch today and we'll explain the benefits of using offshore bonds, if they are the correct investment for you and if you actually need one, so you can make an educated decision with complete peace of mind.