Offshore bonds & tax planning: A 2020 guide

12 October 2020

This content is for information purposes only and should not be taken as financial advice. Past performance is not a reliable indicator of future performance. Any capital you invest might go down or up over time, and you might not get back what you originally invested.

There are many investment options available to international investors, several of which are not commonly known. Here, our UAE-based financial advisers here at Globaleye will be offering our thoughts and insights on one in particular - offshore bonds - and how they could benefit you; particularly when it comes to estate planning.

 

How does an offshore bond work?

A bond is a fixed-income investment; a bit like a loan. Except in this case, you lend your money to a company or government in exchange for a promise of gradual repayment - with interest.

If you live in a country like the UK, you might buy a “domestic” bond by purchasing a gilt (i.e. a UK government bond). If you live in another country such as the UAE, however, you might want to buy bonds from your own country or even around the world.

Unlike a traditional "bond", an “offshore investment bond” is offered by an insurance company which is based in a country that has a favourable tax regime, such as Dublin, the Isle of Man and Luxembourg. This acts as a tax efficient “wrapper”, allowing you to generate investment growth that is mostly/completely free from tax (i.e. “gross roll-up”).

An offshore bond, therefore, can be a powerful way to enjoy more tax-free returns on your  investment(s) and hold more control over when, where and even if you pay tax.

 

An example of gross roll-up

An offshore bond can hold a wide range of assets including mutual funds, individual stocks and shares. The “tax-efficient wrapper”, however, theoretically allows you to generate higher tax-free returns if used correctly. Here is a illustrative example:

Suppose you put £1 into an offshore bond and the value of the £1 doubles in value annually. 20 years later, that initial investment of £1 could be worth over £1m. If it was hit by a 20% tax rate each year (i.e. the UK’s Basic Rate), then the total value would be just over £127,000. Those facing the Higher Rate (40%) might only hope to see about £12,000.

By leveraging the power of an offshore bond, however, you can hope to mitigate the tax impact upon your investment growth - potentially transforming your future.

 

How is an offshore bond taxed?

For a UAE national and resident, the benefits of an offshore bond might seem opaque given the “no-tax environment” of the UAE. However, if you ever plan on moving/working overseas then there could be benefits to using the benefits of an offshore bond (depending on the tax regime of your new country of residence). Here, it will be important to speak with an experienced international financial adviser to ensure you fully understand the taxes, risks and opportunities involved with an offshore bond to help determine its suitability.

For those looking to move to the UAE, there could be clear advantages to an offshore bond. Theoretically, an offshore bond allows you to decide when you will pay tax. If you currently reside in the UK, for instance, then you might choose to cash in some/all of your offshore bond when you finally settle in the UAE.

This is because, under the UK’s Income Tax (Trading & other Income) Act 2005, an offshore bond usually falls within its definition of “foreign policies of life insurance and foreign capital redemption policies”. This means that, as long as you are resident in the UK, gains within the offshore bond are potentially taxable in the UK. By becoming non-resident by settling in the UAE, however, you might be able to enjoy more tax-free gains when you cash in the bond.

 

Implications for tax planning

Offshore bonds, simply put, allow investors a great deal of flexibility and ability to generate tax-efficient returns. Here some distinct benefits to consider:

●      Deferral and resourceful planning of taxation.

●      Simple, versatile; useful for retirement planning.

●      Investments can be switched and tax reporting is not required.

●      Can be great for people looking to work/retire overseas.

●      Not required to be included on a tax return (in the UK), since it is a non-income producing asset.

●      A useful central hub for a diversified range of assets.

●      Grants an investor significant control over his/her money.

●      No subscription limits (you can put in as much as you like).

●      No capital gains tax (CGT) due.

●      Easy to pass money to dependents, since you can encash segments instead of taking withdrawals across the whole policy.

●      The offshore bond can be assigned (in part) to another individual or family member; a feature not widely available to other tax-efficient “wrappers” such as ISAs in the UK.

●      Wide range of provider choice.

●      Options include a redemption or whole of life policy.

●      Online access and payments can be made in many different currencies.

 

Invitation

Here at Globaleye, our financial advisers are here to assist both UAE nationals and expats. Get in touch today to arrange a free, no-commitment financial consultation with a member of our team here at Globaleye.

Reach us here in the UAE on:

Toll free: 800 4558

Email: enquiry@globaleye.com

Tags: uk tax advice offshore bond

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