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HITTING THE SWEET SPOT, HOW OFFSHORE BONDS CAN HELP TRUSTEES

If your clients are considering trust planning, it is important to ensure they use the right underlying solutions to help the trust run efficiently. This will help ensure they don’t place a significant tax and reporting burden on the trustees they appoint, who may be family members with little or no knowledge of taxation and reporting requirements.

Using offshore bonds inside a discretionary trust is a real financial planning sweet spot, and can save trustees a significant amount of time and effort compared to holding the trust assets directly, not to mention the potential tax savings.

Latest figures from HMRC1 released in Sept 2019 show the dividend income tax paid by Trustees jumped by a third in the 2017/18 tax year, reaching £760m.

Trustees (including professional trustees) facing an increasing tax and reporting burden on the trusts they are responsible for could look towards wrapping the assets within an offshore bond structure to help ease this burden. This article is a high level summary of the tax and reporting position for trustees if they hold the assets directly compared to holding them inside an offshore bond.

How offshore bonds can help trustees:

1. Simplify the ongoing administration and reporting requirements:

Trust assets held directly (OUTSIDE an offshore bond):

Dividend and interest distributions will be subject to tax and will need to be reported to HMRC.

Trustees have one basic rate band of £1,000 for income. The amount of tax payable on income within the basic rate band and above depends on the type of distributions received

  • Interest distributions: 20% tax on distributions within the basic rate band and 45% tax on the rest.
  • Dividend distributions: 7.5% tax on distributions within the basic rate band and 38.1% tax on the rest.

Trustees do not have a dividend allowance – so all dividends are subject to tax.

All distributions are subject to tax even if the trust holds only accumulation share classes and nothing is actually received.

Each time there is a switch, the trustee will need to see if there is any capital gains tax (CGT) due. Trustees will have a £6,000 annual exemption; anything above that will be subject to tax at 20% and needs to be reported to HMRC.

If there is more than one trust then the basic rate band and CGT annual exemption are reduced.

 

Trust assets held INSIDE an offshore bond:

The offshore bond is deemed non-income producing.

This means there is no income for the trustees to report or tax to pay on an ongoing basis (provided there is no chargeable event), so no need for complicated tax returns.

This also means that the trustees can switch funds as often as required without fear of triggering a tax liability or reporting requirement.



2.
Keep distributions to beneficiaries simpler and more tax efficient:

Trust assets held directly (OUTSIDE an offshore bond):

The trust can pay out any income it receives to the trust beneficiaries, net of tax, at the trustee rate. There will be no further tax to pay in the hands of the beneficiary. They may be able to reclaim some tax suffered at 45% by the trustees.

If the trust needs to sell assets to pay a distribution to beneficiaries, the sale will be treated as a disposal for CGT purposes.

Any gain over the £6,000 annual exemption will be subject to tax at 20% and needs to be reported to HMRC.

Even if the distribution is to a non-taxpayer, any gain on the disposal will still be subject to tax on the trustees.

 

Trust assets held INSIDE an offshore bond:

Trustees have the flexibility to make tax efficient distributions to beneficiaries which may not need to be reported to HMRC.

They can distribute up to 5% tax-deferred withdrawals each year. They can do this each year for 20 years (i.e. until 100% of the offshore bond premium is withdrawn). The great news is that any unused allowance can be carried forward and used flexibly in the future.

They can also assign policy segments to beneficiaries for them to encash.

  • If the policies are assigned to a non-taxpayer, and the gain on the policies assigned is within the non-taxpayer’s personal allowances, then there may be no tax to pay.
  • If the policies are assigned to a basic or higher rate taxpayer, then the tax on any gain could still be less than the 45% tax that the trustee would need to pay if they encashed the policy segments.

 

These tables only consider the tax and reporting differences between holding investments directly or holding them within an offshore bond. They do not include any general trust charges that may apply such as IHT exit charges.

Other factors: There are a number of other factors you will need to consider, such as any extra charges that may apply if the assets are placed within an offshore bond wrapper compared to holding them directly. This extra cost will need to be weighed against the potential tax advantages and the simplified reporting and administrative benefits for the trustees

[1] Figures are for trusts paying tax at the trust rate (excludes Interest In Possession Trusts) https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/834375/Trust_Statistics.pdf

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. It helps explain the importance of trusts, and why using offshore bonds in trust planning can be beneficial.

If you would like to know more, 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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