When offshore bonds?

1
When offshore bonds?

• Richard Leeson
• Head of UK Business Development, Prudential
  International

2
When?

• Not if or why
• Case for offshore bonds is stronger than ever
• traditional advantages still apply
• new opportunities post-Finance Act 2009
• Suitable for a range of client profiles

3
Income investors 5 withdrawals

• Long-term withdrawals retirement, DGT/ Loan
  Trust
• Gross roll-up better able to sustain long-term
  withdrawals
• Break-even growth rates at 1 AMC
• 6.061 offshore
• 7.347 onshore

Year Fund value at year-end Fund value at year-end
Year Offshore bond Onshore bond
1 199,880 197,801
3 199,622 193,142
5 199,338 188,113
10 198,495 173,720
15 197,422 156,292
20 196,057 135,190
Assumptions Initial investment
200,000 Withdrawals p.a. 5 of initial
investment Gross growth rate p.a. 6 Annual
management charge p.a. 1 Onshore life fund
taxation p.a. 17.5
For 5 annual withdrawals
http//www.pruadviser.co.uk/content/pruinternation
al/consider/longterm/
4
Non-taxpayers assignment

• Non-taxpaying spouses/partners
• Can withdraw tax-free within personal allowance
• Can take 5 withdrawals personal allowance,
  then reinvest personal allowance
• withdrawals create chargeable gains but no tax
• enables increasing withdrawals over time, as
  reinvestment increases 5 allowance
• creating chargeable gain each year reduces the
  eventual gain on cashing in

Assumptions Initial investment 200,000 Growth
rate p.a. net of AMC 6 Tax allowance growth rate
p.a. 3 Age at outset 55 Cashed in at start of
year 6 No product charges included

• Total net withdrawals 53,336
• Cash-in value 207,735
• Chargeable gain at cash-in 26,694

http//www.pruadviser.co.uk/content/pruinternation
al/consider/nontax_payer/
5
Non-taxpayers early retirement

• Can cash in tax-free where gain is within
  personal allowance
• Client invests 200,000 at age 55
• Takes early retirement at 60
• Bond now worth 267,645 (end of year 5, before
  any withdrawals)
• Cashes in 2 segments a year, using personal
  allowance to offset tax on gain
• Total withdrawals over 5 years 150,874
• Total tax paid 2,541
• Year 10 client reaches 65 and takes pension

Assumptions Initial investment 200,000 Growth
rate p.a. net of AMC 6 Number of segments
20 Tax allowance growth rate p.a. 3 Full
personal tax allowance available No product
charges included
http//www.pruadviser.co.uk/content/pruinternation
al/consider/early_retirees/
6
Non-taxpayers moving abroad

• Onshore bond suffers tax at source cannot be
  reclaimed/offset against local tax
• UK collective liable to CGT if away for less than
  5 tax years
• If away for one full tax year, can cash in
  offshore bond with no UK tax
• If returning to UK, time apportionment relief
• Could be
• Clients with property abroad moving at
  retirement
• High earners escaping 50 tax rate

There could be local tax in the country of
residence.
http//www.pruadviser.co.uk/content/pruinternation
al/consider/abroad/
7
Trusts

• Higher tax rates on accumulated income from April
  2010
• 50 on interest, 42.5 on dividends
• Annual tax returns ? accounting costs
• No income if invested in bonds so no tax and no
  tax returns
• but can still take 5 withdrawals if required

8
Loss of personal allowance

• Applies where income is over 100,000
• 1 allowance lost per 2 income above the limit
  until whole allowance is lost
• 60 marginal tax rate
• taxed on 2 income 1 lost allowance
• tax on 3 at 40 1.20
• 1.20 tax on 2 income 60 marginal tax rate
• Only applies to earned income/investment income
  taxed as earned income
• 5 withdrawals from a bond dont count

http//www.pruadviser.co.uk/content/pruinternation
al/consider/higher_earners/
9
Loss of personal allowance

• Example 100,000 earned income 100,000
  invested in UK corporate bond UT
• 5 annual interest ? 5,000 income over the limit
• 2,500 personal allowance lost
• effective tax paid on 5,000 60 3,000
• Switch 100,000 into offshore bond, in UK
  corporate bond fund
• no immediate income tax
• no loss of personal allowance
• no tax within fund

http//www.pruadviser.co.uk/content/pruinternation
al/consider/higher_earners/
10
High earners pension tax relief

• Restriction of relief for high earners
• Relief tapered away from 150,000, to 20 over
  180,000
• Anti-forestalling measures in 2009/10 and
  2010/11

http//www.pruadviser.co.uk/content/pruinternation
al/consider/high_earners/
11
High earners pension tax relief

• 1,000 gross contribution will cost 800 net
  instead of 600 net
• Combined with 50 tax rate, equivalent to 1,600
  pre-tax income, compared with 1,000 at present
• Offshore bonds as a complement/alternative to
  pensions
• loss of up-front tax relief will be less
  significant
• for clients retiring abroad, could be outweighed
  by having no UK tax on proceeds

http//www.pruadviser.co.uk/content/pruinternation
al/consider/high_earners/
12
Non-doms

• Post-2008 tax change
• Client transfers offshore funds into an offshore
  bond
• Taxed on the arising basis
• avoids 30,000 remittance charge
• retains personal tax allowances
• No tax within bond except withholding tax
• Fully portable if client later moves abroad
• If client stays in the UK, can put bond into
  Excluded Property Trust
• protects assets from UK inheritance tax
• allows full access at any time

http//www.pruadviser.co.uk/content/pruinternation
al/consider/non_doms/
13
Technical help
http//www.pruadviser.co.uk/content/pruinternation
al/consider/
14
Technical help
15
Important notes

• Offshore is a common term that is used to
  describe a range of locations where companies can
  offer customers growth on their funds that is
  largely free from tax. This includes "true
  offshore" locations such as the Channel Islands
  and Isle of Man, and other locations such as
  Dublin where Prudential International is
  registered. Tax treatment can vary from one type
  of investment to another, and from one market to
  another.
• All references to tax are UK tax only.
  Non-UK residents may be subject to tax in their
  country of residence.
• Prudential International cannot and does not
  give tax or legal advice and cannot accept
  liability for any loss suffered by any person as
  a result of action taken or refrained from on the
  basis of the material in this presentation.
• The registered office of Prudential
  International is in Ireland at Montague House,
  Adelaide Road, Dublin 2.
• www.pruadviser.co.uk/international