Offshore bonds fund school fees



Foreign currency
Sourced from TaxRebate.org.uk and licensed for reuse under a Creative Commons License.

Offshore bonds are single premium life insurance policies. The bond is an investment portfolio structured in a way to combine a life insurance policy and a portfolio to create a wrapper through which investors can buy, manage and sell their assets. They provide an environment for assets to grow with little or no tax. They also allow the choice of when any tax liability becomes payable.

The flexibility and tax efficiency of offshore bonds means their appeal is not limited to the wealthiest of investors.  They are marketed by life insurance companies who operate in jurisdictions with favourable tax regimes, such as the Channel Islands and the Isle of Man. These companies are mostly subsidiaries of major financial services groups.

Benefits

As with pensions and ISAs, an offshore bond is a tax efficient wrapper that can hold a variety of assets such as stocks & shares, mutual funds or even cash. Their main tax benefit is that growth is largely free of tax.
As long as investments are held within an offshore bond wrapper, income tax and capital gains tax (CGT) are not applicable and it is possible to switch between different funds tax-free. Although investors do have to pay tax on any gains when the assets are withdrawn, there are several ways to reduce the amount paid.

It is permitted to withdraw up to 5% of the initial investment every year for 20 years and defer paying tax until a later date. A higher-rate taxpayer, expecting to become a basic-rate taxpayer when they retire, can defer cashing in their assets until retirement and possibly pay half the tax due on any gain realised.

Ownership of an offshore bond, or part of it, can be transferred as a gift without the recipient incurring any income tax or CGT.

School Fees

Offshore bonds are a very useful, but often overlooked method for funding private school fees.

A tax deferred withdrawal from the bond of up to 5% a year of the original investment could be used to pay school fees.

Parents can avoid or reduce tax further by placing the bond under a bare trust, naming themselves as trustees and the children as beneficiaries. The bond can be split into smaller policies or segments allowing for greater flexibility when the fees are required, e.g. each policy could target one term of school fees. When the fees are due a policy could be fully encashed. By assigning the policies to the children, the tax on the gain will be payable by the child and not by the parent. Since the gain is likely to be within their personal allowance, it should be tax free.

Seek professional advice

Offshore bonds offer a number of tax benefits, especially when time has been spent living abroad, but they are complex structures and professional financial advice should be sought.

Investor compensation schemes are not generally as developed abroad as they are in the UK, so investors should ensure that they fully understand the terms and conditions for each jurisdiction within which they intend to invest. It is also important that the offshore investment is appropriate for the level of risk the investor is prepared to take.

Categories: All, Financial Advice, School Fees Planning

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