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Offshore Bonds
& Locally Compliant
Tax Wrappers
The Pros & Cons Of Offshore Bonds
Offshore bonds have been the go-to option for many expat advisors in recent years. Although they can be a useful tax-efficient investment vehicle when used in the correct circumstances, the restrictive nature of charging structures can offset the benefits they offer.
A detailed understanding of how offshore bonds work is key, and although investment platforms tend to be advanced technologically, flexible and easy to use, there are still locations where the tax advantages of using offshore bonds should not be ignored.
British expats in particular can benefit from offshore bonds if returning to the UK. Before arriving, you should 'endorse' your bond and you'll be entitled to an annual 5% tax-deferred income, in addition to a lump sum equal to 5% for every year the bond has been open. The 5% allowances are taken from the invested capital until it is withdrawn, amounting to a total of 20 years (5% x 20 years = 100%). The remaining funds will be then be taxed as income.
Paying For Your Bond
On of the most important criteria to observe is how you pay for the bond. Fixed charges over a set period, usually 5, 8 or 10 years may apply and it's these structures that limit flexibility, especially in the first few years as closure can incur substantial exit fees.
Furthermore, charges are measured against the initial invested capital and not the value, so if poor fund performance or withdrawals takes the balance below what you invested, you'll be paying charges on funds that are not there. So, if you invest £100,000 paying 1% pa in fees (£1,000), by withdrawing £50,000 and halving the balance, you still incur a charge of £1,000 pa, effectively doubling the fees as a percentage.
Additional quarterly administration fees of over £100 also apply which can amount to a significant increase in charges for smaller amounts. Therefore, it is vital to understand if the fiscal benefits outweigh the investment costs.
How Bonds Can Work For You
Bonds can however, be set up in a pro-investor way and provide benefits that other investment platforms cannot. For example, in locations such as Spain, Portugal or France locally compliant bonds can significantly reduce the tax you pay whilst also completing the tax reporting for you.
Remember
If you are recommended an offshore bond, be sure it is without fixed charging structures, on a fee-only basis and you can access funds without penalty.
Get in touch today and we'll explain the benefits of using offshore bonds, if they are the correct investment for you, if you need one and how to make an educated decision with complete peace of mind.
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