OFFSHORE BONDS COMPARED TO DIRECT INVESTMENTS

The perceived advantages of offshore bonds are:

• gross roll-up of investment income and capital gains;
• 5% per annum income facility, with no immediate tax charge;
• availability of top-slicing relief;
• ability to manage investments (for example, effect fund switches) without triggering any tax charges;
• deferment of tax on profits until final encashment of bond, which could be when the bondholder is paying a lower rate of tax;
• ability to transfer the ownership of (“assign”) parts (“segments”) of the bond to another person (for example, a child or a grandchild) without triggering a tax charge on any gains, and so that the recipient may be able to encash the parts received at a lower tax charge than if the original bondholder had encashed them personally.

While some of these prospective advantages may have a real benefit, we believe the most important point to remember is that offshore bonds turn all income and capital gains into a future prospective income tax liability, which clients and their children / grandchildren may find it difficult to mitigate.  Given the current differential in rates between income tax and capital gains tax, the eventual tax rate may be much higher for offshore bond profits than it would be for directly held investments, particularly if much of the return derives from capital growth investments (for example, company shares) or gains from conventional or index-linked gilts.

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