Latest / Merryn Talks Money / Offshore Bonds: What They Are and Who They’re For

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Offshore Bonds: What They Are and Who They’re For · Merryn Talks Money

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  Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. Welcome to Meron Talks
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  Speaker 1: Your Money, the personal finance edition of Merin Talk's Money.
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  Speaker 1: In these weekly podcasts, we talk about the best strategies
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  Speaker 1: for making the most of your money. I'm Merrior in
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  Speaker 1: some Stweb now. This week I want to talk about
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  Speaker 1: off shore bonds. As we inch closer and closer to
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  Speaker 1: budget day and the talk of increased taxation grows ever louder,
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  Speaker 1: so does the talk of leaving the UK altogether, and
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  Speaker 1: so does the conversation about how if you're going to
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  Speaker 1: stay in the UK you can cut your tax bill. Now,
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  Speaker 1: one thing that comes up over and over again is
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  Speaker 1: off shore bonds. So what are they to help me
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  Speaker 1: with that? I have Poor the Steel, director of John
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  Speaker 1: Lamb Hill old Bridge. She joins me here in the
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  Speaker 1: studio today. John them Hill Oldbridge is a specialist protection
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  Speaker 1: assurance advisor. We're going to ask her to explain that
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  Speaker 1: before we get going, and Paula specifically has worked in
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  Speaker 1: financial services for over forty years, currently focus on life
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  Speaker 1: insurance and later life planning for her clients. Paula, thank
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  Speaker 1: you so much for joining us today. It's a pleasure Paula,
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  Speaker 1: can we just start with that specialist protection assurance advisor.
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  Speaker 2: We advise clients on buying life insurance, and we're specialists
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  Speaker 2: because we deal with very, very high value life insurance.
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  Speaker 2: For people who are looking to buy almost exclusively for
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  Speaker 2: inheritance tax planning, they're buying life insurance because they need
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  Speaker 2: to be able to manage the cash flow for paying
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  Speaker 2: the tax. The life insurance isn't a way of avoiding
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  Speaker 2: the tax. It just gives you the cash flow. So
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  Speaker 2: if you've got a ten million liability, you know you've
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  Speaker 2: got a liability, you don't know when that liability is
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  Speaker 2: going to hit, and you move the risk from your
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  Speaker 2: estate across into the insurance market. So that's what we do.
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  Speaker 1: I see. Yeah, we could lose out of course, under
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  Speaker 1: the circumstances if you lived very significantly longer than you
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  Speaker 1: expected to.
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  Speaker 2: Well that's the subject of risk. You can buy a
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  Speaker 2: life insurance policy that will pay out when you die,
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  Speaker 2: regardless of that. Some of the clients by a shorter term.
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  Speaker 1: So we're going to come back to this, actually not
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  Speaker 1: on this podcast, but this is another thing that I've
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  Speaker 1: actually had on our list. Managing your HD liabilities with
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  Speaker 1: life insurance. So hold on listeners. We're going to come
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  Speaker 1: back to this another day, hopefully with Paula. So let's
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  Speaker 1: start on today's actual topic. What is an offshore bond?
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  Speaker 1: What are we actually talking about here?
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  Speaker 2: An offs your bond is a life insurance policy with
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  Speaker 2: effectively either one hundred pounds or one thousand pounds of
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  Speaker 2: actual life insurance risk insurance, and the rest is a
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  Speaker 2: holding structure for holding investments.
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  Speaker 1: Okay, so it's basically it's a tax wrapper and the
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  Speaker 1: same way as an iSER and a pension.
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  Speaker 2: It's exactly the same as a wrapper, and if you
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  Speaker 2: compare it with an iSER or with a pension, all
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  Speaker 2: of them give you the ability to accumulate funds with
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  Speaker 2: no income tax, no capital gains tax. Internally, the pension
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  Speaker 2: currently works for inheritance tax, but won't from April twenty seven,
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  Speaker 2: So from April twenty seven, they will all be exactly
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  Speaker 2: the same in terms of allowing you to roll up
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  Speaker 2: income and capital gain without tax. The difference is that
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  Speaker 2: when you take the money out of the iSER to
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  Speaker 2: which you are restricted at the moment to paying twenty
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  Speaker 2: thousand a year, you are not going to have to
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  Speaker 2: pay tax to get it out. Similarly, if you put
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  Speaker 2: money into a pension, you're getting tax relief on the
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  Speaker 2: way in which you don't get if it's an iSER,
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  Speaker 2: and you don't get if it's an offshore bond. And
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  Speaker 2: when you take the money out of a pension fund,
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  Speaker 2: apart from the tax tax free cash, you are paying
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  Speaker 2: income tax. And it's exactly the same with an offshore bond.
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  Speaker 2: So all of the gain is going to be subject
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  Speaker 2: to income tax, as it is in a pension. So
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  Speaker 2: you've got your three main wrappers ISA, which is probably
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  Speaker 2: the most effective pension, very effective because of the tax
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  Speaker 2: relief and the twenty five percent tax free cash, and
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  Speaker 2: finally the offshore bond.
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  Speaker 1: So with the offshore bond, the money that goes in
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  Speaker 1: is already taxed and the money that comes out the
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  Speaker 1: other end is already taxed. So the only bit that
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  Speaker 1: is tax free is the accumulation while it is inside
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  Speaker 1: the wrapper exactly okay. And then it has this sort
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  Speaker 1: of rather interesting thing whereby you're allowed to take five
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  Speaker 1: percent of the amount you originally put in out every year.
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  Speaker 2: You are, but that's on a tax deferred basis. Everybody
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  Speaker 2: says it's a tax free five percent it's not. You
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  Speaker 2: can take out five percent without triggering some kind of
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  Speaker 2: tax in terms of the returns that you've got, and
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  Speaker 2: it's up to five percent, so it's really just a
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  Speaker 2: return of your own capital that's coming back to you
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  Speaker 2: without tax.
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  Speaker 1: Okay. That's the interesting bit because people constantly say, oh,
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  Speaker 1: this is so amazing you can take out five percent
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  Speaker 1: a year, to which I go, well, that's the money
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  Speaker 1: you put in in the first place. So this doesn't
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  Speaker 1: seem particularly marvelous. You can take out your own money
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  Speaker 1: on which you already paid tax without paying any more tax.
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  Speaker 1: It seems not particularly exciting.
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  Speaker 2: No, it's the returns which are tax free, and they're not.
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  Speaker 1: They're tax deferred exactly. And so you can do this
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  Speaker 1: for twenty years. You can take out five percent every
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  Speaker 1: year for twenty.
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  Speaker 2: Years, or four percent for twenty five years.
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  Speaker 1: Yes, okay, but effectively you can get all your original
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  Speaker 1: capital back.
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  Speaker 2: Yes, you can get all your original capital back at
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  Speaker 2: any time. The question is where what your tax implications
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  Speaker 2: are of getting it back if you take out more
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  Speaker 2: than the five percent. Because you take out more than
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  Speaker 2: the five percent, you're going to have to pay tax
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  Speaker 2: on the gain.
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  Speaker 1: Yeah, So say for example that I put one hundred
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  Speaker 1: thousand pounds into an austure bond, and three weeks later
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  Speaker 1: I suddenly needed that money back. I would effectively end
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  Speaker 1: up paying my marginal rate of income tax to get
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  Speaker 1: my own capital back. Is that fair?
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  Speaker 2: Only on the gain? You would pay it on the gain.
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  Speaker 2: So if you put one hundred thousand in and it
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  Speaker 2: came out at one hundred and one thousand three weeks later,
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  Speaker 2: the one hundred thousand would be tax free and the
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  Speaker 2: one thousand pounds. But if you're going to take it
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  Speaker 2: all out like that and the one thousand pounds would
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  Speaker 2: be subject to income tax at your marginal rate.
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  Speaker 1: All right, Well, if you can, I think I'm just
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  Speaker 1: not understanding this. If you can always at any time
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  Speaker 1: withdraw your original capital, why do people talk about how
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  Speaker 1: you can take out five percent of your own capital. Yeah, surely,
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  Speaker 1: then you can take out one hundred percent of your
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  Speaker 1: own capital.
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  Speaker 2: Every you can take out one hundred percent of your
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  Speaker 2: own capital, but you've got tax implications. The five percent
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  Speaker 2: comes back without any tax implications because you're just deferring
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  Speaker 2: the gain, because the fact the five percent that you
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  Speaker 2: get out would normally be partly income and part partly
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  Speaker 2: gain and income and partly your original capital.
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  Speaker 1: Okay, so you can you leave the gain inside.
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  Speaker 2: You can leave the gain inside. If you take out
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  Speaker 2: more than the five percent accumulated, then you're having to
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  Speaker 2: pay tax on the element of the gain. And there
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  Speaker 2: are two ways that that gets taxed. And that's where
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  Speaker 2: people need advice because you can find that you get
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  Speaker 2: a horrific tax charge if it's not properly handled. Why
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  Speaker 2: because if you take out more than the five percent accumulated,
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  Speaker 2: they will treat the balance unless you're taking it out
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  Speaker 2: as a segment, they will treat the balance all as gain.
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  Speaker 1: I see.
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  Speaker 2: Any provider will be able to provide you with an
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  Speaker 2: illustration showing how you can get money out with the
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  Speaker 2: minimum level of tax. But if you're taking more than
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  Speaker 2: five percent, you're going to have to pay on the
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  Speaker 2: capital gain. Okay, I see, And the income that's been accumulated.
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  Speaker 1: Right, And do you pay that at the rate of
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  Speaker 1: capital gains and the rate of dividend dividend pay as
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  Speaker 1: income tax that's treated as income tax. This can be
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  Speaker 1: really dangerous.
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  Speaker 2: Yes, And you have the advantage if you are already
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  Speaker 2: a forty five percent taxpayer, then you are going to
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  Speaker 2: pay forty five percent on the gain. If you are
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  Speaker 2: not a forty five percent tax payer, you benefit from
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  Speaker 2: something called top slicing relief. What that enables you to
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  Speaker 2: do is to take the gain that's going to be
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  Speaker 2: taxable divided by the number of years that you've held
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  Speaker 2: the product. So let's say that we'd made a forty
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  Speaker 2: some pound gain and we'd held it for ten years.
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  Speaker 2: We would divide the gain forty thousand by the ten years,
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  Speaker 2: and we would add the four thousand pounds to our
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  Speaker 2: income for that year.
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  Speaker 1: If that then moved you.
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  Speaker 2: From say twenty to forty percent, you would have to
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  Speaker 2: pay forty percent on the whole of the gain. But
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  Speaker 2: if it leaves you still in the twenty percent, you're
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  Speaker 2: only paying twenty percent. So there are ways to reduce
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  Speaker 2: the amount of tax by taking it, maybe splitting it
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  Speaker 2: over two particular tax years, and understanding how top slicing works.
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  Speaker 1: Is there a limit to how much you can put
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  Speaker 1: inside and off your bond wrapper and are the fees
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  Speaker 1: on them generally of a higher level than you might
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  Speaker 1: expect to pay on and ordinary stocks and shares ISO
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  Speaker 1: wrapper for example.
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  Speaker 2: Yes, you should be able to buy a stocks and
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  Speaker 2: shares ISO wrapper for almost no fees. The amount of
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  Speaker 2: fees that you're paying. You need to determine what are
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  Speaker 2: your investment fees and what are your rapper fees. The
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  Speaker 2: rapper fees are very dependent on the amount of money
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  Speaker 2: that's going to be invested. So at one hundred thousand,
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  Speaker 2: you're probably looking at about fifty basis points half of
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  Speaker 2: one percent a year for the rapper. When you get
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  Speaker 2: up to say ten million, then you're going to be
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  Speaker 2: down at about fifteen basis points. Okay, so the rapper
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  Speaker 2: itself is not very expensive. If you do some projections
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  Speaker 2: forward and say am I better off having a direct investment?
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  Speaker 2: Or am I better off? You're always better off in
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  Speaker 2: an iSER, Am I better off in a direct investment
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  Speaker 2: or holding it to an offshore bond? Taking into account
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  Speaker 2: the fees, then you should find that from about year
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  Speaker 2: five you're better off net of tax in the offshore
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  Speaker 2: bond rapper a net of all the fees. Now, it's
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  Speaker 2: slightly dependent on what somebody charges you to get into it,
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  Speaker 2: because you're going to pay partly for the rapper and
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  Speaker 2: partly for the advice.
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  Speaker 1: Okay, And inside the wrapper, when you speak when you
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  Speaker 1: talk about a direct investment, etc. What do people normally
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  Speaker 1: put inside their offshore bond bearing in mind that is
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  Speaker 1: a rapper. Is this something that people normally use for
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  Speaker 1: just an ordinary we might think of as a straightforward
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  Speaker 1: equity bond portfolio or is it somewhere with people wrap
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  Speaker 1: up property or what's going on inside these wrappers?
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  Speaker 2: Personally m M. It should only ever be used for
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  Speaker 2: equity and bond portfolios. There was a point where somebody
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  Speaker 2: was running some kind of you could put some kind
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  Speaker 2: of property in it. I think the general consensus is
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  Speaker 2: that that doesn't work. There is an issue if clients
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  Speaker 2: want to hold direct equities, because if they hold direct equities,
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  Speaker 2: they have to be held to a discretionary fund manager
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  Speaker 2: on a standardized portfolio. Otherwise the portfolio runs the bond,
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  Speaker 2: and this is perhaps one of the biggest risks. The
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  Speaker 2: bond falls into what's known as the PPB rules, which
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  Speaker 2: is the highly personalized bond rules, which gives you a
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  Speaker 2: fifteen percent tax charge on the whole thing every year, unrecoverable.
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  Speaker 2: So if you're holding direct equities, they're going to have
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  Speaker 2: to be held with a discretionary file manager. If you're
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  Speaker 2: happy to hold funds, then you can diy it yourself
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  Speaker 2: or you don't have to have a discretionary firm manager.
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  Speaker 1: Okay, so you can get your wrapper by a couple
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  Speaker 1: of ets. Chuck im in. Bring the cost to the
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  Speaker 1: whole thing down, you can all right, I think I'm
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  Speaker 1: on top of this now. But as far as I
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  Speaker 1: can see, then this is something you would in touch
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  Speaker 1: with a barge poll until you'd absolutely used up all
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  Speaker 1: your allowances and your other rappers, so until your SIP
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  Speaker 1: was pretty full and you used your ice for alliance
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  Speaker 1: every year, etc. This is very much the last choice
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  Speaker 1: of rapper.
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  Speaker 2: I think it's the last choice of rapper if you're
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  Speaker 2: going to hold it in the very long term because
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  Speaker 2: the pension wrapper, because of the effective gearing, the leverage
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  Speaker 2: of the tax relief the pension rap because at the
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  Speaker 2: end of the day, you are going to pay income
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  Speaker 2: tax on all on seventy five percent of the pension
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  Speaker 2: fund when you get it out.
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  Speaker 1: Yeah.
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  Speaker 2: So, but on the other hand, you are getting tax
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  Speaker 2: relief on the way in if you are going to
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  Speaker 2: leave the UK. One of the attractions of offshore bonds
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  Speaker 2: is that if you leave the UK, and let's say
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  Speaker 2: that you go to Dubai, where a lot of people
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  Speaker 2: are going at the moment, you will be able to
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  Speaker 2: surrender it with no tax charge. Now, if you come
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  Speaker 2: back within five years, then there'll be a catch up
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  Speaker 2: on you. But let us say that you had a bond,
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  Speaker 2: you'd put one hundred thousand pounds in it, it's now
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  Speaker 2: worth two hundred thousand. You decide that you're going to
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  Speaker 2: move to Dubai, you will be able to take all
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  Speaker 2: of that out. Better to wait till the following tax
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  Speaker 2: here with no tax because there's no tax to pay
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  Speaker 2: in Dubai. But if you then come back within the
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  Speaker 2: five years, there'd be a catch up tax charge.
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  Speaker 1: This is like those lovely days when you could move
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  Speaker 1: to Portugal and take everything out of your pension entirely
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  Speaker 1: tax free. Don't think you can do that anymore? Can you?
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  Speaker 2: Depends on the double tax agreement. So if you go
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  Speaker 2: to somewhere like Cyprus, you can take it out tax
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  Speaker 2: free because it's pension arrangements. If you are in a
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  Speaker 2: receipt of a state pension. If you go to Malta,
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  Speaker 2: I think there's a flat rate of tax. If you
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  Speaker 2: go to Italy, it depends if you're on the flat
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  Speaker 2: rate or if you've gone into the seven percent rate.
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  Speaker 2: So but it will depend on whether the double tax
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  Speaker 2: Agreement says that pensions are to be taxed where you're
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  Speaker 2: going to or where you currently are, and that's dependent
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  Speaker 2: on the agreement.
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  Speaker 1: Okay, there's another podcast in that Apollo. I feel like
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  Speaker 1: we're going to be hearing quite a lot from you
• 15:16
  Speaker 1: over the next few months.
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  Speaker 2: Have you delighted?
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  Speaker 1: Wonderful? Can I end on the question about who shouldn't
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  Speaker 1: have an offshore bond? Because you know, watching this as
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  Speaker 1: I have for many decades now, I see an awful
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  Speaker 1: lot of articles and suggestions online that people who I'm
• 15:33
  Speaker 1: not sure should have off shore bonds should look at them.
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  Speaker 1: Who shouldn't have one?
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  Speaker 2: If you are going to need a large amount of
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  Speaker 2: capital suddenly now nobody knows what's going to happen going forward.
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  Speaker 2: It should be money that is going to be invested
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  Speaker 2: in the long term because you can buy these on
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  Speaker 2: shore as well. I think that they are more sophisticated
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  Speaker 2: as tax rappers than sometimes people think. Within the John
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  Speaker 2: Amhill Audridge business, we are a specialist provider in that
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  Speaker 2: we don't have an investment proposition. Most of these bonds
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  Speaker 2: are being sold by people who are wrapping up an
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  Speaker 2: existing portfolio or want to wrap a portfolio going forward,
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  Speaker 2: but they want the investment management. And I think it's
• 16:19
  Speaker 2: very much dependent on what people want to do. Is
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  Speaker 2: the additional cost worth it for them? And are you
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  Speaker 2: trying to do a wrapper or that, because sometimes, particularly
• 16:31
  Speaker 2: in the UK market, they would be sold with a
• 16:34
  Speaker 2: discounted gift scheme attached to it, or with a gift
• 16:37
  Speaker 2: and loan scheme which makes them inheritance tax effective, because
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  Speaker 2: as they stand alone, they are not inheritance tax effective.
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  Speaker 2: The asset stays in your state.
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  Speaker 1: Okay, explain the gift and loan scheme a little further.
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  Speaker 2: Let's say that I want one hundred thousand pounds. I
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  Speaker 2: would quite like it to go to my kids, but
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  Speaker 2: on the other hand, I sort of would quite like
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  Speaker 2: to keep it.
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  Speaker 1: So I think a lot of people feel exactly like that, but.
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  Speaker 2: I don't think I really need any gain. So what
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  Speaker 2: a gift and loan scheme does is it says I'm
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  Speaker 2: going to set up a trust, I'm going to lend
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  Speaker 2: the trustees one hundred thousand pounds and they're going to
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  Speaker 2: pay me back five percent a year, but all of
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  Speaker 2: the gain is going to be for the benefit of
• 17:25
  Speaker 2: my kids. So it's very long term planning because it's
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  Speaker 2: going to take twenty years for it to get out
• 17:33
  Speaker 2: of your estate. But if you've got clients in their
• 17:36
  Speaker 2: sixty seventies, for whom they haven't really got surplus capital,
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  Speaker 2: but they don't feel that they're going to need it,
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  Speaker 2: it's a good way to hold on to assets, continue
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  Speaker 2: to take something out of it, but give the future
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  Speaker 2: gain away.
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  Speaker 1: Okay, what do you think the political risk is here?
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  Speaker 1: I mean these kinds of products. If if you were
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  Speaker 1: a politician and your brief was to take care of
• 18:04
  Speaker 1: ordinary people, you might look at the ISA wrapper, which
• 18:06
  Speaker 1: may be change in the budget, and at the SIP
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  Speaker 1: rapper and say, well, you know, that's good enough for
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  Speaker 1: most people. Why on earth do we have available the
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  Speaker 1: third rapper that allows Really from our conversation, I think
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  Speaker 1: we can both agree that it's maybe not your billionaires,
• 18:21
  Speaker 1: but it's certainly the very very comfortable who would use
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  Speaker 1: a product like this. Surely there must be political risk
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  Speaker 1: around this kind of rapper. I mean I can already
• 18:30
  Speaker 1: film myself coming over all reefs and saying, well, that's
• 18:33
  Speaker 1: it away with that one.
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  Speaker 2: I think that we are no longer in Europe. It
• 18:40
  Speaker 2: is the holding mechanism of choice in Europe. So they
• 18:44
  Speaker 2: would need to say they're going to change the taxation
• 18:48
  Speaker 2: of life insurance policies. Okay, I'm sort of weird in
• 18:52
  Speaker 2: that I've been in the same job for over forty years.
• 18:55
  Speaker 2: It's quite a long time, really, But when I started,
• 18:59
  Speaker 2: our clients for paying ninety eight percent tax, they paid
• 19:02
  Speaker 2: eighty three percent income tax, fifteen percent investment income sur charge,
• 19:06
  Speaker 2: and lots and lots of money went into offshore bonds
• 19:10
  Speaker 2: and on shore bonds. There's a very, very long track
• 19:14
  Speaker 2: record of them being there. In theory, the government will
• 19:19
  Speaker 2: get more tax because you're going to pay income tax
• 19:22
  Speaker 2: rather than capital gains tax. So if you look at
• 19:24
  Speaker 2: the way that they project forward, they would be saying, well,
• 19:29
  Speaker 2: it actually we'll get more tax than we would if
• 19:32
  Speaker 2: they held the item in. But on the other hand,
• 19:35
  Speaker 2: we're in a different political world today and everything has
• 19:39
  Speaker 2: political risk. Yeah, I think probably i'd wait if I
• 19:42
  Speaker 2: was going to think about an investment at the moment,
• 19:44
  Speaker 2: I'd wait till after the budget.
• 19:46
  Speaker 1: Yes, well, you're not to learn that everybody's waiting for
• 19:49
  Speaker 1: everything until after the budget. Why we are where we are, brilliant,
• 19:56
  Speaker 1: well fulla Thank you so much for joining us today
• 19:57
  Speaker 1: and I hope that we will be hearing from you again.
• 20:00
  Speaker 2: It's been my pleasure. I've been delighted.
• 20:13
  Speaker 1: Thanks for listening for this week's Maren Talk to Your Money.
• 20:15
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• 20:18
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• 20:20
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• 20:23
  Speaker 1: Underscore Stepic. This episode was produced by Someersidian Moses and
• 20:27
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• 20:30
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• 20:33
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