Personalised portfolio bonds (PPBs), often promoted simply as offshore bonds, have a place in the toolkit of all IFAs providing advice to expats that need to move from country to country, and who require a wide range of investments and various tax benefits.
While financial planners should never put themselves forward as tax advisers, deferred tax planning is where offshore bonds provide benefits. There can be pitfalls, however, which are covered in this piece.
A PPB is a life assurance or capital redemption policy that provides investors with the freedom to invest in a wide range of assets. These assets could include different risk-rated investment funds and cash deposits, as well as individual equities quoted on any recognised exchange, and both corporate and government treasury bonds.
For advisers with no time to manage the investments within the bond, it is possible to appoint a stockbroker or fund manager.
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Key point 1
It is the life assurance company rather than the policyholder that owns the property, which in turn determines benefits payable under the life assurance or capital redemption policy.
As the policyholder has the ability to select the property that determines the policy benefits, the policyholder retains nearly all the advantages of direct personal ownership of the policy.
As the property is held in the wrapper of a life assurance or capital redemption policy, the policyholder does not have to pay tax on dividend and interest income arising from either the investments or capital gains tax on disposals when the investments underlying the policy are altered.
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Benefits of offshore bonds
Bear in mind that residency issues should be looked at on an individual basis.
There may be a small amount of withholding tax on some of the income-producing investments but the funds benefit from gross roll-up. As the funds do not suffer large tax charges, the benefits are rolled up to give greater potential growth than taxed funds.
There is a saying that ‘tax deferred is tax saved’. Of course, there will be a time when the policyholder could be asked to pay some tax. However, tax deferral allows the policyholder to decide when to pay the tax.
If the taxpayer is living in a low tax/nil-tax jurisdiction, PPBs will have a considerable advantage over other products.
There can only be an income tax liability when a ‘chargeable event’ occurs in the following circumstances:
- When the sole or last life assured on the policy dies;
- When the bond is surrendered or a segment of the bond is surrendered;
- If the policy is assigned for money or money’s worth;
- If more than the cumulative 5% of total premiums paid allowance is withdrawn in any given policy year.
Money can be extracted from an offshore bond through ‘partial encashment’ and ‘surrender of segments’.
There are some very important tax implications to consider when deciding which method to opt for.
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Key point 2
There is nothing to say the bond can reclaim all taxes paid within funds or investments and so it would be inaccurate to say that PPBs are tax-free.
An allowance should be made for taxes that cannot be reclaimed and also the country of residence of the individual will determine if there is tax to pay.
In Spain and several other countries, including the UK, income and capital gains tax within an offshore bond should be declared and paid. Indeed, the offshore bond must be registered and qualified in Spain or additional penal tax rates may apply rendering the offshore bond obsolete.
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Time-apportionment relief
When a policyholder has had tax residence outside the UK, a chargeable event gain can be reduced to reflect this period of non-UK residence. This is known as time-apportionment/non-resident relief.
Offshore policies issued by a non-UK resident insurer after 17 November 1983 are eligible for time-apportionment relief. Until 6 April 2013 this relief was only available for offshore policies but, from that date, it was made available to new UK policies.
The gain is apportioned using the formula A÷B, where A is the number of foreign days in the material interest period and B is the total number of days in that period. It is important advisers look at the definition of foreign days and material interest carefully. (For definitions, see HMRC’s Insurance policyholder taxation manual.)
From 6 April 2013 time apportionment relief can apply to new policies issued by UK-based insurers on or after that date, as well as policies issued by UK insurers before then.
These are varied on or after 6 April 2013 in such a way that it results in an increase in the benefits secured where such a policy is assigned from one individual to another or into or out of a trust.
However, one of the overriding attributes of these vehicles is the simplification of tax, particularly for an annual tax return.
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Key point 3
An expat who returns to the UK with a PPB must make changes to the bond or be liable to a deemed 15% pa increase, even if no gains are being accrued.
There are a variety of ways of dealing with the problem, including changing the status of the bond so it does not fall within PPB rules.
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Further reading:
International planning crucial for expats returning home
https://adv.portfolio-adviser.com/awarding-best-practice-a-note-from-the-editor/
By Chris Lean, chartered financial planner, Aisa International
Questions
- With a personalised portfolio bond, who owns any property?
[a. The policyholder
b. The life assurance company
c. The beneficiaries
d. The fund manager] - Under which circumstances is there an income tax liability when a ‘chargeable event’ occurs?
[a. When the sole or last life assured on the policy dies
b. When the bond is surrendered or a segment of the bond is surrendered
c. If the policy is assigned for money or money’s worth
d. All of the above] - Personalised portfolio bonds are tax-free, true or false?
[a. True
b. False] - In which type of jurisdiction do offshore bonds yield the most benefits over other products?
[a. Low/nil tax rate
b. Basic tax rate
c. High tax rate
d. Any type - Which offshore policies issued by a non-UK resident insurer eligible for time-apportionment relief? Those issued…
[a. Before 6 April 2013
b. After 6 April 2013
c. Before 17 November 1983
d. After 17 November 1983] - An expat who returns to the UK with a PPB must make changes to the bond or be liable to what percentage increase, even if no gains are being accrued?
[a. 5% pa
b. 10% pa
c. 15% pa
d. 20% pa]
