Why do offshore bonds continue to be attractive

1

• Why do offshore bonds continue to be attractive ?
• Tim Rees
• Head of Technical Support Delivery
• Clerical Medical

2
Content

• 18 Capital Gains Tax, is there an issue?
• Planning opportunities
• Retirement income planning
• The trustees choice
• University fees
• UK resident non domiciles

3
every chancellor is remembered for one thing

• Norman Lamont 15 interest rates
• Gordon Brown smash and grab on pensions
• Alistair Darling CGT a stealth tax and
  Transferable NRB

4
Reform nothing new for CGT?

• 1978 flat rate (no indexation) - Healey
• 1988 flat rate 30 (limited indexation relief)
  - Lawson
• 1998 variable rate (indexation and taper) -
  Brown
• 2008 flat rate 18 (no indexation or taper) -
  Darling

5
Offshore Bonds v OEICs

• The simple headline has been
• 40 v 18
• But then again, life isnt simple

6
What generates the investment returns?

• Over the last 20 years the FTSE is up 203
  without dividends, however it is up an enormous
  541 once you include them

Source Sunday Times 29th June 2008
7
The 18 CGT charge must mean that bonds offer
poorer net returns 250,000 initial investment
Higher rate taxpayer throughout the investment
term, achieving 30 of return from capital gain
and 70 from income, assume that client only uses
the CGT Annual Exemption in year of encashment.
Other assumptions Capital Gains tax exemption
increases by 2.5 per annum Asset mix is
rebalanced each year Product charges, AMC Bond
0.6 pa, OEIC 1 pa
8
The 18 CGT charge must mean that bonds offer
poorer net returns 250,000 initial investment
Higher rate taxpayer throughout the investment
term, achieving 80 of return from capital gain
and 20 from income, assume that client uses
their maximum CGT Annual Exemptions.
Other assumptions Capital Gains tax exemption
increases by 2.5 per annum Asset mix is
rebalanced each year Product charges, AMC Bond
0.6 pa, OEIC 1 pa
9
The 18 CGT charge must mean that bonds offer
poorer net returns 250,000 initial investment

Higher rate taxpayer initially but a basic rate
taxpayer on encashment, achieving 80 of return
from Capital gains and 20 from Income, assume
that client only uses the CGT Annual Exemption in
year of encashment.
Other assumptions Capital Gains tax exemption
increases by 2.5 per annum Asset mix is
rebalanced each year Product charges, AMC Bond
0.6 pa, OEIC 1 pa
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What are the tax deferral advantages?
1 Income Tax Deferral No ongoing income tax
liability (deferred until chargeable event
occurs).
7 Self Assessment FriendlyEase this burden
immediately.
2 Capital Gains Tax MitigationNo capital gains
tax liability investors returns roll up gross
(only exception withholding tax).
6 Inheritance Tax PlanningAn ideal trust
investment for IHT Planning. No ongoing income
tax liability or reporting and no capital gains
tax liability.
Tax Deferred Structure
5 Assignment Of SegmentsAssign segments to
non/basic rate tax payer, with no/minimal tax hit
in their hands, perhaps use to fund higher
education fees etc.
3 No Immediate Income TaxWhen using 5
withdrawal facility, tax deferred for up to 20
yearsgt Remember, it is cumulative so if not
used, 3 years would be 15. However, income of
say 2.5 could be deferred for twice 20 years
i.e. 40 years.
4 No Capital Gains TaxOn switches of underlying
investments, investment freedom.
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Client Identification Who?

• Clients who will be able to control their tax
  status
• Clients who have beneficiaries that they wish to
  leave money to
• Clients who require a tax efficient income now
• Clients needing a tax efficient income in the
  future
• Clients who plan to become non resident
• Clients who are non UK domiciles

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Financial Planning Opportunities

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Post retirement planning opportunity

• Minimum income under an unsecured pension plan is
  NIL
• Allows ability to structure retirement income to
  reduce amount of income tax payable by utilising
  investments in other tax wrappers
• Can enable a client to plan to avoid paying
  Higher Rate tax.

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Holistic retirement income planning

• First few years pay no tax on tax free lump
  sum and no tax on mutual funds

• Next few years pay basic rate tax via top
  slicing on offshore bond and no tax on mutual
  funds

• Last few years pay income tax on pension
  income and no tax on mutual funds

Note State benefit or Income from savings
could affect their tax status
Pay less tax overall
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Offshore Bonds The trustees choice

• It is a non-income producing asset
• No income no income tax and annual tax returns
• No tax returns no accountants fees
• Simple trust administration, professional
  trustees not normally needed
• Also a perfect fit with pre 22 March 2006
  flexible power of appointment trusts where
  trustees wish to avoid paying beneficiaries their
  right to trust income

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Offshore Bonds The trustees choice

• The 5 withdrawal allowance can be used with
• Discounted gift and income plans to pay the
  settlors right to income
• Loan trusts to facilitate loan repayments

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Offshore Bonds The trustees choice

• Assignment of bond does not give rise to a
  chargeable event gain
• Can assign bond to basic rate taxpaying
  beneficiaries
• Can help save beneficiaries 20 income tax on
  bond gain arising

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Tax Planning for University fees

• Mr Jones is a HRT and will be in the future
• Wants to gift money to children and make it
  available to pay for university fees in 10 years
  time
• Wants investment to be inheritance tax and
  income tax efficient

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Funding for universityfees using an offshore bond
HRT Settlor
Trust
Mr Jones

Offshore Bond
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Funding for universityfees using an offshore bond
Trust
HRT Settlor
Tax on 4,000 gain 1,600
4,000 gain
Offshore Bond
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Funding for universityfees using an offshore bond
Trust
4,000 gain
Offshore Bond
Appoint and assign segments
Non taxpaying adult child at university can
encash without further liability
22
Funding for universityfees using an offshore bond
Trust
Encashment strategysaves 1,600
4,000 gain
Offshore Bond
Appoint and assign segments
Non taxpaying adult child at university can
encash without further liability
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The remittance basis
UK Resident Non Domiciles

• Prior to 6 April 2008, a non-UK domiciled
  individual could only be taxed on foreign income
  if they remitted it to the UK
• As from 6 April 2008, this basis can only apply
  if they pay HMRC an annual charge of 30k
• If they pay the charge they will also lose their
  personal allowance and CGT annual exemption

24
Who should be advised to pay the 30k?
? Pay 30k ?
75,000
Unlikely
Foreign income gains
Dont pay 30k
2,000
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Who should be advised to pay the 30k?
? Pay 30k ?
Overseas gains of more than 189,677 Overseas
income of more than 85,355
Unlikely
Foreign income gains
Dont pay 30k
2,000
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If the client chooses an OEIC

• Income arises in the form of dividends/interest
  distributions
• Distributions taxed on non-UK domiciled settlor
  at their highest rate of tax, say 32.5/40
• Or pay 30k annual charge, spend income arising
  abroad and avoid UK income tax

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If a client chooses an offshore bond

• No income arises
• Settlor can access 5 each year
• No need to pay 30k annual charge
• Only need to be non-UK resident for a single tax
  year to avoid income tax on the bond gain
• Bond can be assigned to other beneficiaries

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Example
Karin is a Swiss domicile who has been living in
the UK for 9 years. She pays HR Tax but has
Offshore Euro deposits Interest
45,000 Remitted to UK 0
Charge Paid Non-dom charge 30,000 Income free
from Tax 45,000
Charge not Paid Tax 18,000
66 Tax !!!
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Example
However if Karin reinvests the capital into cash
funds of an Offshore bond, she can continue to
defer her tax until she incurs a chargeable
event Interest 45,000 Remitted to UK
0
Charge Paid Non-dom charge 30,000 Income free
from Tax 45,000
Charge not Paid Tax Nil
66 Tax !!!
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Utilise the Excluded Property Trust

• Can only be created by a non-UK domiciled settlor
• Settlor can remain a beneficiary of the trust
• Does not fall foul of
• Gift with reservation of benefit
• Pre-owned asset tax
• Unfettered access to trust funds for life

Excluded property trust
Offshore investment
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Excluded Property Trust
Unrestricted access to trust funds
No IHT on settlors death even if he becomes UK
domiciled
Avoids 30,000 non-dom charge
Funds grow virtually tax free inside bond
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IMPORTANT NOTES

• This presentation is aimed at financial advisers
  only. If you reproduce any part of this
  information for use with retail clients, you must
  ensure it conforms to the Financial Promotion
  rules and if the information is used to advise
  retail clients you are subject to the advising
  and selling rules.
• The value of an investment and the income from it
  can go down as well as up and you may get back
  less than originally invested.
• Past performance is not a guide to future
  performance. Clerical Medical Investment Group
  Ltd has made every effort to ensure that the tax
  rates and allowances and other information
  contained in this presentation are accurate as at
  October 2008, however Clerical Medical Investment
  Group Ltd makes no representation as to the
  accuracy or completeness of its content. Tax
  rules may change in the future.
• Issued by Clerical Medical Investment Group
  Limited.
• Registered Office 33 Old Broad Street, London
  EC2N 1HZ. Registered in England and Wales,
  registered no. 3196171. Authorised and regulated
  by the Financial Services Authority.
• Part of the HBOS Group
• Financial Services Authority rules are made under
  the Financial Services and Markets Act 2000 for
  the protection of investors and apply to
  investment business conducted in or from the UK.
  Holders of policies issued by the company will
  not be protected by the Financial Services
  Compensation Scheme if the company becomes unable
  to meet its liabilities to them. CMI Insurance
  Company Limited is supervised by the Regulatory
  Authorities in the Isle of Man and its
  policyholders receive the protection of the Life
  Assurance (Compensation of Policyholders)
  Regulations 1991.