The financial planning experts at The Fry Group discuss the tax advantages of insurance bonds.
Expatriates planning their investment strategies are often advised to use a life insurance bond. We look at why, and more interestingly, how to achieve a tax advantage.
Advantages of UK life insurance bonds
A bond issued by a non-UK (offshore) insurance company offers two principle advantages:
- Many separate investments can all be held in one simple package. Switching between funds is straightforward.
- Often the tax treatment of the bond is different from that applying to the underlying assets. For example, if a UK resident holds cash on deposit then tax is payable on the interest. When holding that same deposit in a bond, no UK tax is payable until a withdrawal is taken – and even then 5 percent of the original investment can be drawn without tax at that time.
Unfortunately, unscrupulous advisers can use bonds to generate extremely high levels of commission. This has given bonds a bad press – but as a planning tool they certainly have their place in any tax adviser’s armoury.
‘Time apportion relief’ on UK bonds
Indeed, starting an offshore bond sooner rather than later can make a good deal of sense. That is due to ‘time apportionment relief’. For example, if you had started a bond in 2000, returned to the UK in 2010 and decided to surrender the whole of the bond in 2011, tax would only have to be paid on one eleventh of the gain. What is particularly attractive is that this relief applies even where the bond has been built up by a number of contributions over many years. So, if you are not able to invest a lump sum but can afford to build up to that lump sum by regular contributions, then the whole of the value in your bond still attracts that beneficial tax treatment.
That is quite convenient as most of us save from earnings, with perhaps the occasional bonus, and simply do not have large lump sums of capital until close to retiring, or just returning back to the UK.
Beware of fees and charges
In that case, we can arrange for a bond to accept contributions over a long period of time so it becomes a good home for savings at the same time as you build up a tax advantage. You do need to be careful though about the charges – expatriates wanting to save regularly is a frequent receipt for ‘rip-offs’.
Of course, the same logic applies if you happen to have a larger lump sum. Again, you need to be wary of the level of commission being charged. You (and your financial planner) will need to assess whether a bond is likely to be effective in your own circumstances.
So, overall, bonds are well worth a look when you are tax-planning (but be careful of the commission) and it can make sense to start sooner rather than later.
Bonds, therefore, have their place in the expatriate’s investment portfolio.