Offshore Investment BondWritten on September 9, 2014 by Kirk Rice LLP
Financial Services QuestionsThe Question:
We want to surrender an Off-Shore Investment Bond but before doing so we want to establish the Tax position. Can you explain/assist?
Kirk Rice LLP answers:
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. This is divided between you and added to your Income to determine the Tax due. This could be Nil if you have no other income and the gain is within your Personal Allowance (£10,000 currently). If not it will be Taxed at either 20%, 40% or possibly 45%.
If adding the gain to your income means you move in to the Higher Rate Tax threshold (40%) 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’. For instance a gain of £50,000 on a Bond invested for 10 years would have a slice of £5,000 (£50,000 / 10). This is added to your income and if it remains below the Higher Rate Tax threshold you will pay Tax at 20% and not 40%.
If some of the ‘Slice’ falls in the Higher Rate Tax Band this part will be Taxed at 40%. If you lived overseas at any point during the term of the investment you may be entitled to Time Apportionment Relief. This allows an adjustment to the Gain as you should not pay Tax for the period you were living overseas. 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. Finally, 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 but possibly at a lower rate. It may also be beneficial to make partial rather than full surrenders over a number of years. For an accurate calculation and Tax planning please get advice from an Independent Financial Adviser.
If you would like more advice regarding this issue or any other financial services matter, please contact us.
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TAXATION – INFORMATION IS BASED UPON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.
TAX PLANNING IS NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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