Is your Bond onshore or offshore?

In my last article I talked about old investment bonds turning up in the back of a drawer, sold years ago and rarely looked at since. Before we get into more nuanced planning opportunities, there’s a more basic question worth asking: is your bond based in the UK (onshore), or is it held overseas (offshore)? It’s an important distinction, as it can have a significant impact on the tax outcome. Do you know which one you have?

The bond documents themselves rarely spell it out plainly. You often need to look at the underlying provider and where the policy is administered. The Isle of Man, Dublin and Luxembourg are among the most common jurisdictions for offshore bonds. If the provider is a UK insurance company, it is likely to be an onshore bond.

Interestingly, the difference is not usually the investments held within the bond. You could hold exactly the same portfolio in either structure. The distinction lies in how the underlying fund is taxed before you ever touch it.

With an onshore bond, the insurance company pays tax on income and gains within the fund as it goes along. As a result, when a gain is eventually assessed, basic rate taxpayers will often have no further tax to pay, whereas higher and additional rate taxpayers may face an additional liability.

With an offshore bond, the position is different. The underlying investments can generally grow without UK tax being applied within the bond itself, often referred to as “gross roll-up”. In the right circumstances this can be advantageous. However, when the bond is eventually encashed there is no equivalent tax already having been paid within the structure. Any gain is assessed according to the policyholder’s circumstances at the time.

The result is that the same £50,000 gain can produce a very different tax outcome depending on whether the bond is onshore or offshore, and on the individual’s tax position in the year the gain is realised.

I had a client a few years ago who assumed her bond was offshore because it had originally been presented to her as an “international” product. It was, in fact, an onshore bond and had been throughout the entire period she held it. The international element referred to the investment fund range rather than the bond structure itself.

It didn’t alter the outcome in her particular case, but it easily could have done. She had been making decisions about timing, withdrawals and future planning based on an assumption that simply wasn’t correct.

Knowing whether your bond is onshore or offshore is one of the first things to establish before making any decisions about encashment, withdrawals or estate planning. It is a simple point, but one that can materially affect the tax outcome.

If you have an older investment bond that has not been reviewed for some time, it is worth checking not only how it has performed, but also how it is structured and whether it still aligns with your wider objectives.

 

This is issued by IPS Capital LLP of 4 Eastcheap, London EC3M 1AE; a limited Liability Partnership registered in England OC328405 and authorised and regulated by the Financial Conduct Authority.   It is issued in the UK only. This publication does not constitute advice and is for information purposes only. You should not make any investment decision based on this information alone. The information contained herein is correct to the best of our knowledge and we may not be held liable for any errors or omissions. IPS Capital LLP does not offer tax advice and you should seek professional tax advice for your own circumstances. The value of investments can fall as well as rise and you may not receive back the full amount of your original capital.