Take the tax advantage

Jim Eberwein

A combination of an offshore investment with trusts can produce substantial tax savings for any well advised UK resident domiciled investor. There are different types of offshore investment but for efficient tax planning purposes the offshore insurance bond is the vehicle for sheltering income and capital gains.

The insurance bond is tax efficient because income and gains can be accumulated tax-free with the exception of withholding taxes, usually nominal, on equity-based investment. It has the edge over other offshore investments as it provides the usual five per cent a year income tax-free facility and fund switching does not generate a tax charge.

There are two types of offshore insurance bond – the highly personalised bond and the bond linked only to internal funds of the life office. The life cover in both types of contract is nil in most cases. Where the bondholder's money goes into a pool of funds managed by the life insurance company, the only legislation which applies to taxing the profit on, for example, an enactment, is the chargeable event rules.

With highly personalised bonds which are linked to a fund of the investor's personally selected portfolio of holdings, the Inland Revenue can invoke anti-avoidance legislation in s.739-749 of the Taxes Act 1988. The legislation allows the revenue to see through the offshore entity to determine income that is attributable to the UK resident. However, if the investment is totally geared towards capital growth, the anti-avoidance legislation will have little or no practical application.

Offshore insurance bonds provide shelter from capital gains tax which means switches can be made without generating liability to the tax, according to s.210 of the Taxation of Capital Gains Tax Act 1992.

When it comes to using trusts, the bond is in a class of its own as it can achieve a greater number of tax advantages: bonds do not produce pure income and are outside the usual anti-avoidance income tax settlement provisions in Part XV of the Taxes Act 1988, under which the settlement income is taxed as that of the settlor; the taxable entity is the settlor, if living, otherwise there is no liability to income tax. Also, unlike most other investment vehicles, an insurance bond is outside the ambit of capital gains tax legislation.

Trust plans can be designed for UK residents or expatriates to avoid one more of the three taxes at different stages: income tax, capital gains tax and inheritance tax. Plans can be designed, not only for the investor, but can be carried over from one generation to another. The trusts provide flexibility in that they can be varied to take account of changing family circumstances and are capable of lasting up to 80 years.

With an offshore bond, there are no tax advantages in using non-UK resident trustees and the client and another person are usually appointed trustees. The client is normally appointed protector whereby they have the power to appoint or dismiss trustees and consent is required to dispose of capital.

Jim Eberwein is senior adviser of trust & taxation sales at Clerical Medical Investment Group.