Cashing in an offshore unit linked investment bond

peterfleet

This is a question about what tax is payable if an offshore unit linked investment bond is encashed.

My relative is a UK resident standard income tax payer who made a lump sum investment with a well known insurance group in an offshore bond 10 years ago. She has been withdrawing 5% pa of the original investment from the bond.

Let's say for convenience that the lump sum investment was £100,000. She has withdrawn £5,000 per year tax free for 10 years = a total of £50,000. The current investmend bond has a statement value of £60,000. There are no surrender deductions with this bond after 5 years.

On paper there seems to be a gain in the bond value of £10,000, after taking into account the withdrawals. Should there be any tax to pay on encashment? If so, how is this calculated?

MJSW

Yes, based on your figures, the gain would be £10,000. This will be taxed at the marginal tax rate of your relative, with possible top slicing relief if the gain takes them into higher rate tax.

If it had been a UK policy, then you are generally treated as already having paid basic rate tax/savings rate on the gain (up to 03/04 tax year the rate on these policies was 22%, this falls to 20% for 04/05 onwards). Consequently there is only an additional tax liability for higher rate taxpayers.

However if the policy is an offshore one, it is unlikely that there will be a deemed credit for basic rate tax. So on the face of it, the tax liability would be £2000 for a disposal in 04/05 if within basic rates, or £4000 if subject to higher rate (with a possible credit for top slicing relief).

This is a complicated area. You are probably best asking the insurance company for details of the tax treatment of their specific policy. Inland Revenue guide IR321 gives information on the tax implications of foreign life insurance policies.