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Kirk Rice Blog

Off Shore Investment BondWritten on April 14, 2016 by Peter Sharratt

My wife and I invested in an Offshore Investment Bond whilst we were working and living abroad. We want to cash it in but are unclear if there will be a Tax liability. We are hoping you can clarify.

I can certainly explain the process which hopefully will assist you.  Whilst invested, an Off Shore Bond will benefit from Tax Free growth, but upon surrender any gain/profit will be taxable.  The gain (called a chargeable gain) is subject to Income Tax, NOT Capital Gains Tax (CGT) and so your CGT Allowance is of no use.  To calculate the chargeable gain you take the surrender value, add any previous Withdrawals and then deduct the amount originally Invested.  The resulting figure is the chargeable gain.  You can claim Time Apportionment Relief for the period you were overseas to reduce the chargeable gain.  For example, if you held the Bond for 10 years, but 6 of these were while you lived overseas the chargeable gain can be reduced by 6/10th or 60%.  The resulting chargeable gain is divided between you, and added to your Income to determine the Income Tax due.  Adding the chargeable gain to your income may mean your income moves in to the Higher Rate Tax threshold (40%) in which case you can use ‘Top Slicing’ to reduce the tax liability.  This allows you to divide the gain by the number of years the investment has been running which gives a ‘Slice’.  You do now have to exclude any period you were overseas.  Taking my earlier example, if the chargeable gain after the Time Apportionment Relief was £50,000 you could use 4 years of Top Slicing (6 were used for Time Apportionment Relief) which gives a ‘Slice’ of £12,500 (£50,000 / 4).  This Slice is added to your income and if it remains below the Higher Rate Tax threshold you will pay Tax at 20% not 40%.  If some of the Slice falls in the Higher Rate Tax Band this part will be taxed at 40%.  If you pay tax at differing rates you may find it beneficial to assign the Bond to the one paying tax at the lower rate prior to surrendering.  Any chargeable gain will be against their tax rates, which could give a saving.  If you do not need the full amount you can withdraw 5% of the original investment for each year the Bond has been running tax free, but tax will be payable in future, possibly at a lower rate. It may also be beneficial to make partial surrenders over a number of years.  For an accurate calculation and tax planning, please get advice from an Independent Financial Adviser.

Any reader interested in discussing this topic further can telephone Peter Sharratt on 01344 875000 or email peter.sharratt@kirkrice.co.uk

If you would like to receive Money Matters & Taxing Times electronically, simply email info@kirkrice.co.uk stating Money Matters & Taxing Times in the subject heading and we will add you to our distribution list.

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