FOR FINANCIAL ADVISERS ONLY

FOR FINANCIAL ADVISERS ONLY

Consumer
Share

Onshore and Offshore bonds

This ‘Back to Basic’ guide lays out some of the basic facts that should be considered and show some of the differences between onshore and offshore bonds.

Please note that this is a basic guide and not comprehensive. More detailed information is available in other specific Knowledge Direct articles.

Comparison between onshore and offshore bonds:

Onshore Offshore

Tax deferred allowance of 5% of each investment available from the year of investment until the investment has been withdrawn (generally 20 years).
Any unused allowance can be carried forward.

Tax deferred allowance of 5% of each investment available from the year of investment until the investment has been withdrawn (generally 20 years).

Any unused allowance can be carried forward.
Underlying corporation tax is paid by the insurance company on the funds.  This tax is deducted from the investment and the investor receives a tax credit for the tax deemed to have been suffered. Generally no tax paid on underlying funds and they receive gross roll up. There can be some tax on interest and dividend payments called Withholding Tax.

On surrender or part surrender, basic rate tax will be deemed to have been paid (covered by corporation tax that the insurance company paid).
If the client is a higher or additional rate tax payer they will have an additional 20% or 25% tax to pay.

If the client is a non-tax payer they cannot reclaim tax.

On surrender or part surrender, full tax will be paid on all gains at client’s marginal rate.

As no corporation tax is paid on underlying funds tax will be paid at 0%, 20%, 40% and 45% rates depending on client’s tax position.

Can use the 0% starting rate for the first £5,000 of savings if applicable as any gain is taxed at the 'savings income' rate.

From 6 April 2016 can use any available personal savings allowance.

Can use full personal allowance.
Top slicing is available on gains, where applicable. Can top slice by full number of policy years back to the start of the bond (or to the last chargeable event date if later for partial surrenders). Top slicing is available on gains, where applicable. Always top slice back to the start of the bond irrespective of any previous chargeable events.
As the bond suffers underlying fund taxation this can restrict the fund growth. The bond has little or no underlying taxation and so benefits from gross roll up and potentially greater fund growth and returns.
For lower and basic rate tax payers tax is already deemed to have been paid (covered by insurance company tax paid at approximately 18.4%). If clients encash bond while they are a UK tax payer they will have full taxation to pay on any gains at their appropriate rate (i.e. nil, 10%, 20%, 40% or 45%).
UK residents always pay tax (either underlying tax already paid (corporation tax) or additional personal tax if higher or additional rate tax payer.
Underlying corporation tax already paid is non reclaimable if the client is nil rate tax payer.
Non UK resident taxation will depend on the taxation of country of residence.
For UK residents who have spent some intervening years abroad then time apportionment relief may apply.
UK resident tax will be due on gains at the client's full marginal rate (as no underlying corporation tax paid). Non UK resident taxation will depend on taxation of country of residence.
For UK residents who have spent some intervening years abroad then time apportionment relief may apply.
Insurable interest is supposed to exist between the bond owner and any life assured. Whether insurable interest is required will depend on the rules of the offshore jurisdiction. For example, the Isle of Man does not require insurable interest whereas Dublin does.
Projection rates take into consideration the underlying UK taxation. Projection rates do not need to consider UK taxation and so can use higher rates.
Cost of administration of bond and fees available are generally lower. Cost of administration of bonds are generally higher.
Potentially suitable investments for people who are likely to be basic rate tax payers at point of encashment. Potentially suitable for individuals who are going to be non UK residents or tax payers at the point of encashment.
Potentially suitable for people who are just after simplicity within an investment product. Potentially suitable for people who are looking for wider asset classes available for investment.
Potentially suitable for people who are just after simplicity within an investment product. Potentially suitable for people who are looking for wider asset classes available for investment.
Related Knowledge Direct articles that may be of use:
Advantages of using a UK bond
Chargeable Gains on Onshore Bonds and Taxation
Related Knowledge Direct articles that may be of use:
The super six benefits of an offshore bond for UK
UK taxation of offshore bonds, Part 2

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

Financial Adviser Verification

The content of this site is for advisers only. It is not for the use of Hong Kong advisers. You can change the regional content by selecting a region from the drop down box in the top right-hand corner.