Offshore Investment Bonds (when, why, for whom)

Corncrake2

jem16 wrote: »

For an offshore Bond and a non-taxpayer I'm struggling to work out the advantage to be honest.

So am I !
Cant get that calculator to work for me (maybe cos it is a top slice calculator, I'll have another go later)

The bit I cant get my head round (if I am understanding you all) is this :

(1)
Surrender Value = 110,000
Premium Invested was 100,000
Gain = 10,000
Tax is liable, may be due, on 10,000
Seems reasonable so far !

(2)
Surrender Value = 110,000
Withdrawals previously= 5,000
Premium = 100,000
Tax liable ? Gain = 10,000 + 5,000 = 15,000

But previously you may have paid tax ** on that 5,000 (in the year in which you received it)
so you end up paying (or liable to pay ) again on that 5,000 bit as part of the 15,000 in the year of surrender. Seems odd.

EDIT ** or not in the case of a non tax payer

I must be stupid, or going blind
or worse both !
Thanks for your efforts, sorry that I am such a poor student

jem16

Corncrake2 wrote: »

(1)
Surrender Value = 110,000
Premium Invested was 100,000
Gain = 10,000
Tax is liable, may be due, on 10,000
Seems reasonable so far !

Correct - where no withdrawals have been made it's very straightforward to calculate the gain.

(2)
Surrender Value = 110,000
Withdrawals previously= 5,000
Premium = 100,000
Tax liable ? Gain = 10,000 + 5,000 = 15,000

Correct. if the withdrawal had not happened, then the surrender value would have been £115k as opposed to £110k. So if £100k was the initial investment then the gain would be £15k.

But previously you may have paid tax ** on that 5,000 (in the year in which you received it)
so you end up paying (or liable to pay ) again on that 5,000 bit as part of the 15,000 in the year of surrender. Seems odd.

Not odd at all as the 5%pa withdrawals are always tax-deferred and not tax-free. When full encashment happens your tax liability is based on the full gain.

So if £15k was your gain, the first £10k (or whatever is the current tax-free personal allowance) and £5k would attract 20% tax.

Daniel54

jem16 wrote: »

It is, yes. The 5%pa withdrawals are merely tax-deferred withdrawals and not tax-free withdrawals.

I think this is one of the very rare cases where you are mistaken

The bondholder can withdraw 5% ( plus unused allowance from previous years) of the original capital amount tax free per annum , as the capital amount is deemed to have been tax paid when paid into the bond

Any withdrawal in excess of this is a chargeable event and therefore subject to tax

jem16

Daniel54 wrote: »

The bondholder can withdraw 5% ( plus unused allowance from previous years) of the original capital amount tax free per annum , as the capital amount is deemed to have been tax paid when paid into the bond

Yes I understand this. It's basically a return of capital. However from the point of view of final encashment, these withdrawals are included in the final gain so are subject to tax at that point. That was why I was referring to them as "tax-deferred" as it doesn't take away that liability.

Any withdrawal in excess of this is a chargeable event and therefore subject to tax

Agreed.

Corncrake2

jem16 wrote: »

Not odd at all

ummm, the thing that was striking me as odd was that 5000 ( which in my example was in excess of the 5%ers cos they have been rolled up as 20y and equated to the Premium Invested )
odd insofar as if I had any other income that took care of my p.allowance then that 5000 would have become taxable at the basic rate (or what ever banding did or will apply ) in that year of receipt ? And then taxable again on surrender.
Not my case but may be worth looking at, of interest to Perdu and others perhaps who may look in ?

In my case it looks like I should surrender now before the gain gets any bigger ! If I am still understanding you there is no point in taking a few years times 5% plus some extra to go into this years p.allowance leaving a reduced balance to be taken at surrender into next years p.a.

Corncrake2

Corncrake2 wrote: »

(1)
Surrender Value = 110,000
Premium Invested was 100,000
Gain = 10,000
Tax is liable, may be due, on 10,000
Seems reasonable so far !

(2)
Surrender Value = 110,000
Withdrawals previously= 5,000
Premium = 100,000
Tax liable ? Gain = 10,000 + 5,000 = 15,000

Gosh I am a twit, my example (2) was flawed,
to be compared with (1) I should have written :
(2a)
Surrender Value = 105,000
Withdrawals previously= 5,000
Premium = 100,000
Tax liable Gain = 5,000 + 5,000 = 10,000

This is a simplistic example assuming that the taking of the 5,000 has simply reduced the final gain by the same amount.
In fact the taking of 5000 has reduced the earning capacity of the bond by slightly more than that depending on the length of time to surrender.
So realistically it may look more like this :-
(2b)
Surrender Value = 104,500
Withdrawals previously= 5,000
Premium = 100,000
Tax liable Gain = 4,500 + 5,000 = 9,500

In other words the 5000 taken earlier has discounted the value at surrender, which in turn does not mean a double accounting for tax.

My excuse is that I got hung up on the deferred status of the 5%ers, that is a red-herring cos it all gets accounted for in the Premium. (As I think Dan was saying)
and my brain cell went awol

Corncrake2

jem16 wrote: »

For an offshore Bond and a non-taxpayer I'm struggling to work out the advantage to be honest.

Dont forget that in those days, when dinosaurs roamed the land, we could not reclaim tax already deducted at source in BS and Banks
Perhaps the same was true of onshore bonds ?
Then there is the matter of the tax paid by a UK company that reduces the potential for the bond and still ? cannot be claimed back, whereas no such tax is imposed in the IoM.

Mind you, now, the Withholding Tax may impose a similar impost on (some?) ofshore accounts.
Cant think of anything more at the mo. but give me another G&Tonic and I may

TH1878

jem16 wrote: »

For an offshore Bond and a non-taxpayer I'm struggling to work out the advantage to be honest.

Unlike onshore bonds, some of the gain will be taxed at the 10% savings rate as it is classed as savings income.

Struggling apart from that, especially considering how much these contracts used to cost!

jem16

TH1878 wrote: »

Unlike onshore bonds, some of the gain will be taxed at the 10% savings rate as it is classed as savings income.

That should be even more useful from next year then with the savings rate being 0% and increased to £5k. So it should cover £15,600 at 0%.

Struggling apart from that, especially considering how much these contracts used to cost!

Yes I think that's the biggest issue.

Corncrake2

Now y'all given me another headache, should I surrender this year or next !

I thort of another historical reason for these o-s.bonds, back then p.allowances could be give to the unearning spouse and a man could give all the married man's allowance to his wife's earnings.
So the allowances for those early years were not wasted.

That does not help anyone looking in here for advice on starting one up.
Advice is > "only if your are a high rate and envisage lower in the future" ? is that right ?
And I certainly should not re-invest in them cos my income is going to rise !