Zero coupon bonds
Guide to offshore bonds introduction
The purpose of this factsheet is to give you information about the use of offshore bonds as an investment vehicle, so that you can effectively consider their use when recommending tax and investment strategies to your clients.
What is an offshore bond?
For UK tax purposes, an offshore single premium investment bond is a non-qualifying policy which can be written on either a life (whole of life) assurance or a capital redemption basis. Where a policy is written on a life assurance basis, the policy will come to the end on the death of the sole or last surviving life assured. Of course, the policy can be surrendered at any time, but may be subject to the deduction of early surrender fees over a specific period. Where a policy is written on a capital redemption basis, it has a fixed term and a guaranteed surrender value at the end of that term. As with a life assurance policy, a capital redemption policy can be surrendered at any time, subject to any early surrender fees that may apply. Access is possible to withdraw up to 5% of the total premiums paid into a bond each policy year for 20 years, without the client incurring an immediate liability to income tax. If the 5% allowance is not fully used in a given policy year, the unused allowance carries forward to the next policy year on a cumulative basis. There is no need to detail these withdrawals on your client’s self-assessment tax form until the bond is surrendered or withdrawals more than the 5% allowance are taken.
An offshore bond could be a suitable investment vehicle for those clients that require a broad investment choice. Offshore bonds offer a much more expansive choice in comparison to most onshore bonds. If your client demands a choice between thousands of investment funds, including pooled funds such as unit trusts and open-ended investment companies (OEICs), institutional funds, hedge funds, cash deposit accounts and many more, then an offshore bond may be worthy of your consideration.