Offshore Bonds and Tax Wrappers for Expats
With good expat financial advice, offshore bonds provide significant tax benefits over other investment platforms. With commission structures removed and a qualified financial advisor providing prudent advice, the inherent features of offshore bonds can be beneficial in many countries.
Bond Segmentation
The ability to assign 'segments' of bonds to others is a significant difference over other platforms. When opened, a bond can be split into hundreds or even thousands of individual segments, each representing an equal portion of the capital invested (eg. £500,000 can be split into 1,250 segments of £400).
Each segment fluctuates proportionately with the bond's value and when withdrawals are made, the policy holder can assign segments to others, in turn reducing their own tax liability by transferring it over to the assignee. This makes segmentation ideal for higher-rate tax payers to gift capital to family or loved ones on lower tax rates. Other popular uses for segmentation include providing university funding or helping children get on the property ladder, as their incomes and tax rates are likely to be lower.
An example - a bond makes 50% a gain over time and the policy holder assigns segments worth £22,500 to their children in the UK. A withdrawal of £22,500 would comprise £15,000 invested capital + £7,500 (£15,000 + 50% growth), and tax is due on the growth element only.
The personal tax allowance in the UK is currently £12,570 (22/23), so zero tax is due on the £7,500 growth unless the assignee is earning more than £12,570. Either way, it's likely to be less than the higher-rate tax-paying bond owner. Put simply, a bond holder can reduce their own tax liability by using tax allowances of other individuals.
Taking Withdrawals and Income
Offshore bonds have often been recommended when a non-insurance wrapped investment platform may have been more suitable (in a pension structure, for example). But taking a tax-deferred income from non-pension assets or savings is when offshore bonds can provide the most benefit.
If returning to the UK, a repatriating expat should 'endorse' their offshore bond with the provider and thereafter, will be entitled to an annual 5% tax-deferred income in addition to a lump sum equal to 5% for every year the bond has been open.
Any accumulated lump sum or 5% income allowances are taken from the 'invested capital' until it is exhausted over 20 years - ie. 5% x 20 years = 100%. Thereafter, you are deemed to be taking gains and taxed at your marginal rate. Annual withdrawals greater than the 5% allowance will also be taxed.
Always clarify how your bond will be taxed where you expect to take withdrawals, and remember that offshore bonds are still sold with lock-in periods facilitating large upfront commissions to advisors. If financial penalties apply for closing the bond at anytime, find an advisor operating on a fee-only basis without commission structures, and that's where we can help you.
To speak to an expat financial advisor that can answer questions on offshore bonds and explain how to use them correctly, contact us today and our team will get right back to you.