Onshore or offshore?

Mark Peters, retail pensions and investment proposition director at Zurich UK Life, discusses the tax advantages of choosing offshore bonds.

Last year saw a huge array of measures designed to overhaul expenditure, raise tax and find ways to address unprecedented government debt. What we can take from the year that has gone is that we face a long, sustained period of high taxation.

The introduction of the 50 per cent additional rate of tax for those with a total income of more than £150,000, together with a tapered annual personal allowance for those earning more than £100,000, has been confirmed as more than a short-term measure. While the limits are aimed at the highest earners at the moment, the creation of this new income tax band gives the government scope, should the public purse need it, to spread the net wider in the future.

Those households with at least one member with earnings above the higher rate tax (HRT) threshold will also lose their child benefit payments, often worth hundreds of pounds per year.

Against this backdrop, the need for financial advice is more relevant than ever, particularly for those with total income above, or indeed close to, the £100,000 threshold for the tapered personal allowance, and also the HRT threshold, particularly for those in danger of falling into the child benefit trap.

In some ways these changes have swung the pendulum back towards non-income producing tax wrappers, such as investments bonds, both onshore and offshore, as the renewed debate around bond versus collectives takes on another dimension, given the increase in capital gains tax.

Tax strategies

Remember, investments returns come from four main sources; capital gains, dividends, interest and rent with tax having the ability to shrink all of them. We should see tax as a cost associated with investing, and choosing the right wrapper can therefore substantially minimise the impact. The use of investment bonds has always been part of tax planning strategies.

The ability to mitigate income tax, capital gains tax and inheritance tax is perhaps a more powerful driver for HRT payers and in today’s high tax environment investment bonds are perhaps an ideal vehicle for the more ‘tax-aware’ investor.

Case study

Let’s consider the following example. A person earning £95,000, with gross dividends of £15,000 and gross interest of £4,950 would have total earnings of £114,950. If we use the 2011-12 annual personal allowance of £7,475 for illustration purposes, and apply the £1 reduction for every £2 earned over £100,000 that applies next year, the £14,950 over the threshold would effectively wipe out the individual’s personal allowance.

However, if they were to restructure their portfolio, making use of non-income producing wrappers, such as investment bonds, the client could maintain their personal allowance and ultimately reduce their overall tax bill.