It is also possible to assign some of the segments to the investor’s non-tax paying children to help fund university fees or take advantage of a spouse or registered civil partner’s lower tax rate.
Offshore investment bonds are typically made up of a number of identical segments. Anywhere from one to ‘hundreds or thousands’ of individual segments can be established when the bond is set up. The investment, and any additional investment, will be spread over these segments.
Withdrawals can be taken from the bond at any time. There are two ways to do this:
- By taking an equal amount of money from each of the segments in the bond – partial encashments
- By taking the amount by encashing a specific number of segments -full surrender
Typically, if a withdrawal is taken as a partial encashment, the chargeable gain is calculated as the excess of the amount withdrawn over any accumulated 5% tax deferred allowances.
If a withdrawal is taken by full surrender, in addition to surrender penalties, the chargeable gain will be the current value of the segment(s) less the original starting value of the segment(s) (assuming no subsequent additional investments and/or earlier other partial encashments had been made).
For large ‘one off’ withdrawals, full surrender should be considered. Whilst your clients’ may want to avoid possible surrender penalties this method may be more tax efficient than taking a partial encashment, depending on your clients’ circumstances.
Increasing the number of segments allows for greater pinpoint tax planning. This can only enhance the attraction of an offshore investment bond now we have an environment of higher taxation.
Let’s take Jane as an example:
Jane is a higher rate taxpayer and invests £150,000 in an offshore investment bond with 1,500 identical segments (each with an initial value of £100). After the bond has been in force for six months, she needs to withdraw £28,000 to help pay for home improvements and she takes this by partial encashment. At this time, the surrender value of the bond is £153,000.
The 5% tax deferred allowance is £7,500 (£150,000 X 5%) and the chargeable gain is therefore £20,500 (£28,000 less £7,500). The gain is taxed at 40% producing a tax liability of £8,200.
But what if Jane was to make the withdrawal by full surrender rather than partial encashment?
As the surrender value of the bond is £153,000, each of the segments has a value of £102, and she fully surrenders 275 of her 1,500 segments to cover the amount she needs (£28,000). As the value of each segment is greater than the initial value, there is a gain. The gain is £550 and is based on the current surrender value of the 275 segments (£28,050 (£102 X 275)) less the original starting value of the segments (£27,500 (£100 X 275)). The tax on the gain will be £220 (£28,050 less £27,500 X 40%).
By fully surrendering individual segments, Jane pays tax of £220 as opposed to £8,200.
