Specialist Independent Advisers based in East Anglia

Lovewell Blake Financial Planning Limited

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Benefits of going offshore with your savings

16 January 2012

Wealthier investors are using the benefits of offshore bonds in a bid to escape punitive new taxes on pensions and to help with inheritance tax planning.

One reason for this trend is the recent change limiting how much people can save into a pension each year.

A rise in rates of Capital Gains Tax (CGT), and a freezing of the Inheritance Tax (IHT) allowance, has also led more investors to look at ways of minimising the tax charges on their investments.

People are now only able to save up to £50,000 a year into a pension.  This limit is still clearly far more than most people can afford to save each year, but it does mean that once high earners have maximised their pension and Individual Savings Account (ISA) contributions, then offshore investment bonds become an option.

So what is the advantage of going offshore? Does this effectively allow richer investors to sidestep tax?

The answer is no. Offshore bonds don't allow you to avoid tax completely, but they can be a good way of deferring it. This can be particularly beneficial to those who are higher rate taxpayers today, but expect to be basic rate taxpayers when the investment is cashed in.

One of the main advantages is that both offshore and onshore bonds allow customers to withdraw five per cent of their investment each year tax-free,  although strictly speaking the tax is deferred until the bond is cashed. For retired investors and those looking to produce an income from their investment this can be an extremely attractive option.

The main difference between onshore and offshore bonds, is that with offshore, gains can roll-up tax-free, which should mean higher returns. The downside is that charges may be higher, though the charges on both on and offshore bonds are broadly similar.  An additional downside is that investors may not have the same protection under the Financial Services Compensation Scheme.

As well as allowing investors to choose when they pay tax, some of these bonds will also allow investors to choose whether returns are taxed as income or capital gains. With careful tax planning this can help them minimise overall tax bills.