Placebo or panacea?

Last month I touched on the difference for a UK resident non domicile being taxed on a remittance or an arising basis. This month I intend to look a little deeper into this subject, and how one winner in the recent budget was the offshore bond providers.

Clearly the offshore bond is not the universal panacea and there are potential drawbacks for the investor: the most significant objections appear to fall in the area of investment restrictions. This highly personalised bond legislation places restrictions on investments while the owner of the bond, the recipient of the funds/income or a named beneficiary if written under trust is resident in the UK

These regulations prohibit among others:

a. Individual stocks and shares;

b. Physical property;

c. Currency trading.

For most clients these restrictions may not appear too great a price to pay for the tax benefits, however for a sophisticated investor who is used to his portfolio being managed by a discretionary manager, and holding funds in multiple currencies, these restrictions can at first appear prohibitive.

The restriction on physical property does not usually meet with much objection, it is the stocks and shares and currencies that cause consternation.

Collectives v Individual Shares. I think this has been well covered, the simple argument being that the investment manager is effectively investing in long only funds and the returns suffer accordingly.

However, pointing out that most regulated funds available are acceptable to most bond providers, and that these funds can be quite imaginative mean some of the objections start to disappear.

Currency trading. Now this is a little more contentious. All of the offshore bonds I have come across have a base currency. That is the currency in to which all valuations etc are reported and typically is the currency that the original settlement is made.

What an investor definitely can not do is then actively trade between currencies - that is to say, move between currencies on a regular basis. But, there is nothing to stop you holding a collective that speculates in currency.

Currency can be an issue for these clients, as often their assets are held in different currencies, and more times than not they will look to withdraw funds in a currency that is not necessarily the base currency of the bond; for example, when the client returns either temporarily or permanently to either their original domicile or another domain. It is therefore important that an adviser makes sure that multiple currencies are acceptable to the bond provider, even if the original settlement is in one currency.

This can quickly narrow the offshore bond providers you are able to use. I do not have enough room left in this article to list all of those who do not allow multiple currencies, or even allow you to alter currencies without surrendering the bond, creating a chargeable event, and hence losing the benefits you have worked hard to achieve. I can however, confirm that both AXA and Skandia DO allow you to hold multiple currencies or hold a currency, and make payments in a currency other than the base currency.

Dominion. Remember the 5% per annum tax deferred withdrawal feature is a UK concession - if any withdrawals are made in any other country they will be taxed according to the laws of that land.

And the laws of the land that the client may return or move to are important to consider when making the recommendation. Generally speaking, if they are likely to return to a European Union country then an EU domiciled bond is preferred (e.g. Dublin based) to a non-EU Bond (e.g. Isle of Man).

With the measures announced in the recent budget, including the 50% income tax band, the removal of higher rate relief on pension contributions, along with many others, the UK Res Non Dom Client, particularly those who have retired, will be looking for tax planning alternatives - the Offshore Bond is well placed to pick up the pieces.