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Newsletter | Articles Offshore Investment Bonds – An Overlooked Tax Planning Tool In the UK offshore investment bonds are a collection of investments held under a non-qualifying insurance policy, which is governed by its own tax rules. They are often overlooked as a tax planning tool despite the fact they benefit from unique tax treatment. Time should be taken to understand the mechanics and tax treatment of offshore bonds, as well as their advantages and disadvantages. Depending upon the investor’s circumstances these bonds can prove to be highly tax efficient tools. The Taxation Rules Due to certain tax rules, including some dividends being subject to withholding tax in their country of origin and offshore insurers not being subject to UK income or capital gains tax (CGT), the investor can benefit from gross investment returns. Unlike assignments of assets subject to CGT, an assignment of the bond does not allow for a tax charge. Investments switches within the bond are not subject to CGT. There is no tax liability if annual withdrawals do not exceed 5 per cent of the original investment. This 5 per cent allowance is cumulative, but stops when withdrawals total the amount originally invested. If withdrawals exceed the 5 per cent, or on full encashment, the excess or gain is subject to savings rate tax at 20 per cent. Tax and the Trustees Trustees will pay tax arising on chargeable events at 40 per cent. If trustees are non-resident the tax is payable by the trust’s UK resident beneficiaries. If both the trustees and beneficiaries are non-resident, no UK tax is payable. Retirement planning For individuals who have, for example used their lifetime allowance for pension purposes, a bond may be attractive. When they reach retirement they can defer taking their pension (reducing their income to nil) and encash segments of the bonds with a view to limiting the tax charge to no more than 20 per cent. For more information contact David Ashton.