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Understanding the real benefit of ‘gross roll-up’

‘Gross roll-up’ is a term used to explain a beneficial tax position of offshore bonds. This advantage derives from the fact that the bond provider is based in a tax-efficient environment and money can accumulate within the bond virtually tax-free.

  • Tax-efficient environment means offshore bonds are not liable to income tax, capital gains tax or corporation tax on assets.
  • Virtually tax-free growth: withholding tax may be deducted on some dividends in their country of origin, but once inside the offshore bond, funds can grow tax-free.

Gross roll-up has clear advantages from an ongoing tax and reporting perspective for clients, as discussed in the previous article in this series. This article focuses on the financial benefit gross roll-up can have in helping your clients build their wealth quicker, and/or sustain their income stream for longer.

 

Financial benefit of gross roll-up

To show how growth can accumulate quicker in a gross roll-up environment, the chart below shows a growth comparison between offshore bonds, unwrapped collective investments and onshore bonds.

Growth comparison chart

  Offshore bond Collective investments Onshore bond
Initial investment £100,000 £100,000 £100,000
Product tax paid during the 10 year period £0 £0 £7,006
Personal tax paid during the 10 year period £0 £2,754 £0
Value after 10 years £148,024 £144,786 £139,703

Assumes a net annual rate of return of 4% (2% is from capital growth, 1% is from dividends and 1% is from interest), client is a higher rate tax payer, with a £500 personal savings allowance and £2,000 dividend allowance. The figures do not include product or advice charges. Please note that this example is entirely fictional and used for illustrative purposes only.

 

How gross roll-up can help sustain an income stream for longer

As demonstrated above, gross roll-up can help your clients build growth faster, but for those clients who want a sustainable income stream from their investments, gross roll-up becomes even more powerful.

When money is regularly withdrawn, gross roll-up helps to soften the cumulative impact this can have on the remaining investment. This is demonstrated in the diagram below which shows the impact of withdrawing £5,000 (5% of the initial investment) each year for 20 years.

Impact of withdrawing chart

  Offshore bond Collective investments Onshore bond
Initial investment £100,000 £100,000 £100,000
Product tax paid during the 10 year period £0 £0 £9,744
Personal tax paid during the 10 year period £0 £4,271 £0
Total withdrawals taken during the 10 year period
£100,000 £100,000 £100,000
Remaining value after 20 years £70,222 £63,824 £55,215

The same assumptions as above apply. Please note that this example is entirely fictional and used for illustrative purposes only.

As the table shows, over 20 years the cumulative impact of gross roll-up can help to reduce the impact of taking regular withdrawals on the remaining investment, by as much as £15,000 in comparison to an onshore bond.

These figures only look at growth, and do not take into account any difference in product charges that may occur, and do not look at the different net values after encashment.

 

Other financial planning considerations

You will of course need to consider the needs and long term financial goals of your client before deciding which solution may be more suitable. As and when your client plans to encash their offshore bond in the future, this will be an important advice point to ensure they access the money in a tax-efficient way.

If the client surrenders policy segments from the offshore bond, they will be subject to income tax on the gain at their marginal rate of tax, which could negate the benefit of gross roll-up. However, if your client assigns segments to their spouse, civil partner, or children, or if they place the offshore bond into a trust, then the net position could continue to be extremely beneficial.

 

Interested to know more?

Offshore bonds brochureWe 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.

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