The tax treatment of offshore investments

The tax treatment is dependent on the type of product taken and tax legislation is always subject to change, with the treatment of an offshore bond dependent on the tax regime of the territory where the provider is established.

However, there may be some withholding tax payable on the policy holder’s fund. Assets can also be bought and sold within the bond without creating any immediate tax liability.

So, explains Simon Willoughby, head of proposition at Axa Wealth International, for a UK resident the bond is treated in broadly the same way as the UK equivalent but the actual tax suffered by the UK investor will be different.

Offshore life insurance bonds, for example, do not pay any income and capital gains on the underlying funds at source, apart from any irrecoverable withholding tax. This is one of the great offshore attractions, and is referred to as gross roll-up.

Tax is taken at the end of the life of the bond and is calculated based on the client’s personal tax circumstances at the time.

“This mean those who are paying higher rate tax payers today and think they will be lower rate tax payers at a later date, says Darius McDermott, managing director of Chelsea Financial Services, may benefit as they would pay a lower amount of tax, for example.”

Also, for UK clients up to 5 per cent of the amount invested can be taken out per annum for up to 20 years and if not used the 5 per cent allowance is cumulative up to 100 per cent of the original investment amount

So where no withdrawals are made in year one, 10 per cent can be withdrawn in year two and so on. The allowance continues until the entire premium has been withdrawn.

“Importantly, the tax that should be paid on this amount can be deferred, so effectively you can take money out now and pay tax later. If you take out more than this amount then there will be a tax charge.”

Sometimes withholding tax can be deducted from the dividends and interest payments but this will depend on the country where the investment is held.

This tax can not always be reclaimed, so advisers need to investigate the fine print before investing client money to ensure there are no nasty surprises.

Offshore bonds can be easily assigned into a trust, adds Rachael Griffin, head of technical marketing at Skandia, which can reduce or eliminate UK inheritance tax

“Most insurers will have draft deeds available which allow your clients to easily assign bonds into a trust,” she says.