Offshore Savings

Many offshore funds are operated by subsidiaries of well-known onshore institutions. Such funds are able to offer a wider range of investments than their onshore counterparts owing to the differing regulation offshore. Different types of regulation can mean less security but the very diverse nature of the offshore market means that generalisation can be misleading. As professional Independent Financial Advisers, we can identify well-run investments that make the most of the tax advantages that offshore regimes have to offer. Income distributing funds pay their income gross, which is particularly attractive to non-taxpayers.

If the investment is a unit-linked one, its value can reduce in direct relation to the stock market prices of its underlying assets, although it can also rise. This means you may not get back all the money you invested.

If it is a with-profit arrangement, there is not the same direct link between the underlying assets and the value of your policy. This is because the insurance company holds back some profit from good years to offset losses in poor ones - this is referred to as smoothing.

An offshore investment is one, which is held, literally, offshore, i.e. not under United Kingdom jurisdiction. If you invest in an 'onshore' bond then the fund manager will be liable to pay certain UK taxes on the underlying fund, which as well as being non-reclaimable, will also hold back the growth of your investment. An 'offshore' bond is liable for no UK tax and therefore grows virtually tax-free.

That is not to say that you can necessarily avoid paying UK tax. You may still find you will have to pay some but, with careful planning, you can control when you pay.

Of course if you are living abroad currently, or you plan to move abroad during the life of your investment, you may well object to paying UK-based taxes, especially as these are non-recoverable, and therefore an offshore bond enables you to invest without any liability to UK taxes.

Offshore investment bonds do not generate income and hence generate no UK tax liability until the proceeds are brought back onshore.

Offshore Investment Pensions

Pension's investment can also include an offshore element, although in the UK the tax advantages of pensions have been steadily eroded about other tax-efficient investments, which are more flexible. In particular, for high-earners, the pension provision over and above that allowed for tax purposes can be invested in an offshore Funded Unapproved Retirement Benefit Scheme. However, the Inland Revenue has so far refused to give these investments 'pension' status. The non-UK life assurance sector has been particularly innovative in these types of products.

Offshore Bond Taxation

Unlike their onshore equivalents, offshore bonds do not pay corporation tax on income and gains within the fund, although withholding tax on dividends is not reclaimable. This 'gross roll up' of income and gains generally has the effect of causing the fund to grow more quickly than an onshore fund. Income withdrawals are achieved by selling units. Provided annual withdrawals do not exceed 5% of the initial investment, no liability to tax will arise until the bond is encashed in full, thus providing an important tax deferral opportunity. Withdrawals in excess of 5% per annum are liable to UK Income Tax at your highest rate as is the overall gain on final encashment. On final encashment, any 'gain' in the value of the Investment Bond, taking into account any previous withdrawals, is added on to your income and is subject to tax in the normal way. There is relief for any period you are resident outside the UK .