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ACHIEVING TAX-EFFICIENT WITHDRAWALS USING AN OFFSHORE BOND

Offshore bonds can be powerful solutions if used in the right way. Not only can they help your clients build wealth faster in a gross roll-up environment, but they also enable your clients to retain this benefit by providing tax-efficient access to the money.

Top three ways to help protect the benefit of gross roll-up and access wealth tax-efficiently:

1. utilise the 5% withdrawal allowance

2. assign policies to a non tax payer

3. assign policies into trust

 

1. UTILISE THE 5% WITHDRAWAL ALLOWANCE

This 5% withdrawal allowance on offshore bonds is a key benefit. It means your clients can withdraw up to 5% of their premium each year without any immediate tax liability or tax reporting obligations.

Clients can do this each year for 20 years (i.e. until 100% of their premium is withdrawn). The great news is that any unused allowance can be carried forward and used flexibly in the future.

Which clients may benefit from this?

Clients in, or saving for, retirement

With an offshore bond, clients can access their 5% withdrawal allowance each year to supplement their income in retirement.

Alternatively, they can accumulate their 5% withdrawal allowance to build up a lump sum in retirement. For example, in 10 years’ time, they can withdraw 50% of their premium as a lump sum, with no immediate tax or reporting obligation.

Utilise the 5% withdrawal allowance

 

2. ASSIGN SEGMENTS TO NON TAX PAYERS

Another key benefit of offshore bonds is that the bond is divided into individual policies. This makes it possible for policies to be assigned (as gifts) to other people. If the policies are assigned to a non tax payer, and the gain on the policies assigned is within the non tax payers’ personal allowances, then there may be no tax to pay.

The allowances currently available in the 2019/2020 tax year are:- personal allowance £12,500, personal savings allowance £1,000, starting rate of 0% on savings income £5,000, which totals £18,500.

Which clients may benefit from this?

Clients saving for their children to go to university

They can use an offshore bond to assign policies to their non tax paying child (aged 18+). If the gain on the policies assigned is within the allowances available for the child then there will be no tax to pay.

Clients saving for their children to go to university

 

3. ASSIGN POLICIES INTO TRUST

It is also possible to assign policies into trust as and when required.

Clients are able to assign to multiple trusts at different times. Assigning policies (as a gift) into trust does not trigger a chargeable event, so the assignment doesn’t need to be included in a self-assessment tax return.

This provides clients with the flexibility to do some IHT planning in the future without needing to encash the bond and realise a gain, making life simpler from a tax and reporting perspective.

Which clients may benefit from this?

Clients with future IHT concerns who have a lump sum inheritance to invest

By using an offshore bond, clients can retain access to the money in case they need it, but have the flexibility to place it into trust in the future when estate planning becomes their priority.

Offshore bonds are non-income producing assets so can work well inside a range of trusts for IHT planning.

Clients with future IHT concerns who have a lump sum inheritance to invest

Other ways to withdraw money – and support for you

These are just some of the ways that offshore bonds can help your clients maximise tax efficiency as part of their financial planning. If your client wishes to encash more than the 5% withdrawal allowance, surrender individual policies, or surrender the whole bond, they will be liable to tax on the gain at their personal rate of income tax. The calculation of the gain differs for each method.

For more information on the different ways your clients can withdraw money from an offshore bond and the tax implications please see our quick reference guides. Please ensure your client understands the tax consequences involved if they don’t withdraw money from their offshore bond in the most appropriate way.

 

Want to know more?

We have a new simplified brochure explaining the growing advice opportunities for offshore bonds and how they can work alongside other solutions to help provide better overall control, flexibility and tax efficiency for your clients.

If you would like to know more about offshore bonds, please contact your usual Old Mutual Wealth consultant today, or contact your local offshore specialist.

Offshore bonds

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

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

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