Portfolio bonds are relatively simple structures for managing investments; they are sometimes referred to as wrappers.
Offshore portfolio bonds have an added tax advantage, and may be recommended to those who can benefit from the likes of tax deferral, gross roll-up or top slicing relief, or to those who want to focus on inheritance tax planning.
In this report we’re going to take a detailed look at offshore portfolio bonds so that you can understand whether such a solution could be worth your consideration. We will explain the jargon and identify the pros and cons.
Please note, the following article is for generic information purposes only, and does not constitute advice.
What is a Portfolio Bond?
Portfolio bonds sometimes get called wrappers, because they effectively wrap up all your investments in one place for ease of management. That is, portfolio bonds enable you to bring all your investments under one umbrella – and this is what makes them such a convenient investment choice.
Since you have all your investments in one place, this allows you to view the portfolio performance easily, and make quick and accurate decisions when necessary.
Portfolio bonds are very flexible and potentially advantageous if you’re working with an advisor towards the overall management of your financial position.
You can use a portfolio bond to grow your capital for a certain amount of time (e.g. a fixed term of 5 years), for tax planning or to take a regular income.
Once established, portfolio bonds are fairly cost effective to run. Moreover, they are entirely flexible as the underlying investment can be made in any instrument as long as the value of that instrument can be exactly determined.
This means that you can carefully diversify your portfolio through investment across various asset classes, all from the single simple structure of your portfolio bond.
A portfolio bond can make a fantastic addition to a trust when it comes to asset protection and tax reduction purposes. And the inclusion of a life insurance policy into the structure means that your family can be afforded a decent level of financial protection in the event of your death.
How Is an Offshore Portfolio Bond Different from an Onshore One?
An offshore portfolio bond is a structure that combines an insurance contract and a bank account to create a holding vehicle for various types of investments and is set in an offshore jurisdiction.
Offshore portfolio bonds are single premium life insurance policies marketed by companies based outside the UK. The most popular jurisdictions for offshore bonds are Ireland, Channel Islands and Isle of Man.
Since offshore portfolio bonds are based and managed outside of the UK, they are subject to different tax regulations compared to onshore bonds. There might be different bonds suitable for different types of investors, but what most of them have in common is that they aim to produce long term capital growth.
In short, offshore portfolio bonds provide a wrapper that offers investment and tax benefits not generally available in the UK.
Since offshore bonds can have many tax advantages, they may be of use to you if you’re an expat or an international investor.
As offshore portfolio bonds have an added tax advantage, they may be recommended to those who can benefit from the likes of tax deferral, gross roll-up or top slicing relief, or to those who want to focus on inheritance tax planning.
What Goes into an Offshore Portfolio Bond?
You can consider all types of investment for inclusion in your portfolio bond, as long as the value of what you include can be quantified. So, your portfolio bond can contain almost everything – deposit accounts, money market instruments, equities, bonds, gilt and fixed interest securities, derivatives, property and other financial instruments.
Investing into a portfolio bond with a larger provider can make it possible to buy into funds. Funds are a collection of assets that have been handpicked by a dedicated team who analyse the economy, choosing assets that they believe are going to increase in value such as.
Funds are normally only available to high net worth clients. If you are not one of them, normally you wouldn’t be able to access funds. However, if you go with a large portfolio provider, you most certainly will have an opportunity to invest into such funds.
How Is an Offshore Portfolio Bond Set Up?
The process of setting up a portfolio bond is fairly straightforward and simple.
Firstly, you as the investor enter into a direct and personal contract with an offshore insurance company – i.e., a company based in a favourable and regulated offshore jurisdiction such as the Isle of Man, Luxembourg, or Guernsey, for example. Dublin is also getting more popular with expats for its perceived increased regulatory protection and tax efficiency.
This company insures your life, establishes a bank account on your behalf, and you get an insurance policy from the insurance company in return.
Thus, you become a client of the insurance company, the insurance company becomes a client of the bank. Your investments are held within your insurance policy with you being the policyholder, and the bank account is held in the name of the insurance company.
You can either take control of the ongoing investment of your money or use the services of an investment or fund manager from the bank, or use the services or a financial brokerage for the ongoing investment of your funds.
What Are the Benefits of Offshore Portfolio Bonds?
The main benefits of offshore portfolio bonds are personal and asset privacy and security, and taxation planning. Achieving either of them will depend entirely on your circumstances and position, and expert advice should always be sought.
Depending on your chosen jurisdiction, it can be possible to legally protect against creditors and bankruptcy when you designate a particular third party, (e.g., a spouse), or entity, (such as a trust), as your insurance policy beneficiary.
When it comes to inheritance tax, planning an offshore portfolio bond combined with a trust structure may prove highly beneficial for optimising your IHT, which is another attractive feature of portfolio bonds for some people.
The personal privacy afforded from an offshore portfolio bond can be increased by careful selection of the offshore jurisdiction in which the insurance company is based.
The primary level of protection comes from the fact that the underlying bank account is held in the name of the insurance company. The secondary level can come if you as the investor select an insurance company based in an offshore jurisdiction where it is strictly prohibited for insurance companies to divulge any client information.
When it comes to the taxation benefits of establishing an offshore portfolio bond, the most prominent advantage is the fact that such a structure is usually 100% free of local taxation. Again, this depends on the jurisdiction in which the structure is established.
There are certain other income, gains, death or estate taxation benefits that can be accrued which depend entirely on your countries of residence and domicile.
How Are Offshore Portfolios Taxed?
One of the strong advantages of using an offshore portfolio bond is that it gives you control over when and how muchyou pay tax.
As we have already mentioned, within an offshore bond your investment growth is in most cases free of tax. It is called gross roll-up. It’s a particularly significant advantage, because without being taxed within an offshore bond, your investment can grow much faster.
If you don’t bring the money from the bond into the UK, it is not subject to the UK taxation. However, it will be taxed in a country of your residence, should you decide to bring the money in there. Hence, it is important to know exactly what your tax obligations are in the country you reside.
It is important to choose the provider and the jurisdiction of your offshore bond very carefully, as this will determine your tax position and how you can access your money.
What Are Potential Tax Benefits of an Offshore Portfolio Bond?
1. Gross roll-up
We have already talked about the significance of gross roll-up, which means that any underlying investment gains within your portfolio bond are not subject to tax at source, apart usually from withholding tax if and where it applies. Gross roll-up can mean that an offshore investment has the potential to grow faster than one in a taxed fund where you pay 20% tax on all income.
To illustrate, let’s imagine that there are two hypothetical funds with equal growth of 8% a year; one is offshore with no tax on growth within the fund, the other is onshore where the growth is taxed at 20% annually.
You are investing 50,000 with each of them for the duration of 5 years. The table below shows how your investments will be growing in both portfolio bonds.
|Year of |
|Offshore Portfolio Bond |
|Onshore Portfolio Bond |
(growth less 20% tax)
|1||54,000 (4,000)||53,200 (4,000 – 800)|
|2||58,320 (4,320)||56,605 (4,256 – 851)|
|3||62,985 (4,665)||60,228 (4,528 – 905)|
|4||68,024 (5,039)||64,082 (4,818 – 964)|
|5||73,466 (5,442)||68,183 (5,126 – 1,025)|
|Your Income |
for 5 Years
As you can see, your income is growing differently year by year, and when the tax is applied to your onshore bond growth, it reduces the profits even further.
By the end of year 10, should you decide to invest for 10 years, you would have to pay over £10,000 in tax for your onshore portfolio bond, and your after tax income from it would be £42,979 compared to £57,944 of income from your offshore portfolio bond. Should you happen to find yourself in the 40% tax band, your income would be decreased even more dramatically.
Of course, this example is purely hypothetical, aimed to illustrate how you can benefit from a gross roll-up. What is not hypothetical is the impact of tax on your earnings. So where offshore portfolio bonds are suitable and appropriate to your circumstances, they can help significantly to optimise your income through careful tax planning.
2. Tax deferral
If you’re a taxpayer, you may be able to benefit from tax deferral. An income tax charge will not arise until your bond is partly or wholly cashed in. You can withdraw 5% of the original premium from the bond for 20 years cumulatively without being subject to tax, because it will be treated as a return of capital.
3. Time apportioned relief
This means that a chargeable gain on an offshore bond can be reduced in proportion to any time you’ve been resident outside the UK for tax purposes.
So, for example, if you’re a non-UK resident and non-UK taxpayer for half the time you hold the bond, your taxable gain would be reduced by half.
4. Top slicing relief
When you sell your offshore bond, and the gain pushes you into a higher tax bracket, it is possible to reduce your income tax liability using top slicing relief. The relief won’t have any effect on your taxes if, when added to your other incomes, the profit from the bond won’t move you beyond 20% tax band or if you are already a higher rate tax payer.
If, however, the income from the bond pushes you into the next tax band, you will have a situation where a part of the profit is within the basic rate and a part is within the higher rate.
In this case top slicing allows the gains to be spread across the number of years the bond has been hold. The chargeable gain is divided by the number of full years that the bond has been in force before being added to the taxable income.
The actual calculations of the tax due are pretty complicated and best left to your accountant to complete. The result of the top slicing relief is a noticeable reduction of higher rate tax on a chargeable event gain.
Other tax benefits of offshore portfolio bonds may exist, and these will depend on your own personal circumstances.
Can I Plan for Inheritance Tax Through Portfolio Bonds?
If you wish to structure your assets with inheritance tax planning in mind, offshore portfolio bonds might be a perfect tool for it. Usually a bond established with this in mind will be placed in trust. In so doing this can take it outside of your estate.
A trust can help to reduce or even eliminate any inheritance tax liability your family may face. However, depending on the way you write your bond in trust and the type of trust chosen, it is possible you will lose certain access rights to your investment, and/or any growth it may generate during your own lifetime.
You could set up your offshore portfolio bond on a capital redemption basis. If you do this it means there will be no life assured, so the bond just continues for up to 99 years until the most convenient or tax efficient time to cash it in – possibly across generations.
What to Take into Consideration
When deciding whether an offshore portfolio bond is a right way for you to invest, there are several things worth keeping in mind:
Setting up an offshore portfolio bond can be relatively expensive, depending on numerous criteria, therefore it may only make sense if you have investible assets over a certain minimum (e.g., £50,000).
This can be assessed on a case-by-case basis, and the cost/value consideration will depend on where you establish it, how you structure it (e.g., within a trust or not), which company you favour as your insurance company, and what you’re hoping to achieve from your portfolio bond.
There are additional fees to consider such as for the management and maintenance of the structure itself. This could make it more expensive in real terms to wrap your investments rather than holding them separately.
However, the other benefits you may enjoy from a portfolio bond could outweigh this negative.
If you’re likely to need access to your investment in the short-term it may not make sense to structure it within a portfolio bond, as early encashment or access may result in a financial penalty.
Your investment into a portfolio bond is not guaranteed. Depending on the assets invested and the method of investment, the value of a portfolio bond and any income taken from it can go down as well as up.
Like any other investment, offshore portfolio bonds carry risks as well as advantages. If you’re an expatriate living, working, retired or just invested abroad, make sure you understand the offshore financial and taxation landscape before committing to any investment.
It is also important that you do your due diligence on any recommendations made.