Non-taxpayers Briefcase
Non-taxpayers Briefcase
The challenge
- To minimise tax on investment growth and withdrawals
- To maximise the potential to make sustainable withdrawals over a period of years
- To provide the potential for the withdrawals to increase over time
- To ensure flexible access
The offshore bond solution
- Client, aged 60, invests £200,000 in Portfolio Account
- Each year, withdraws 5% of total investment plus amount of personal tax allowance
- Reinvests the personal allowance into the bond (can be done at no cost, depending on chosen charging structure)
- Withdrawals create chargeable gains, but no tax as the gain is equal to the personal allowance each time
- Enables increasing withdrawals over time without any immediate tax liability, as the reinvestments increase the 5% tax-deferred allowance
- Bond is cashed in at end of year 15
- Creating chargeable gains each year reduces the eventual chargeable gain on cashing in
| Creating chargeable gains yearly | Taking 5% withdrawals only | |
| Net withdrawal in year 1 | £10,000 | £10,000 |
| Net withdrawal in year 14 | £17,108 | £10,000 |
| Total net withdrawals | £183,971 | £140,000 |
| Cash-in value | £197,944 | £256,552 |
| Chargeable gain | £25,164 | £196,552 |
Assumes net annual growth rate of 6%; tax allowance annual growth rate of 3%, starting from 2011/2012 allowance
What are the advantages?
- No tax except withholding tax paid within funds - more potential to sustain regular withdrawals without significant capital erosion - see the difference
- Open architecture - huge fund choice
- Preferential terms and annual management charge rebates on majority of funds
- No tax other than withholding tax within funds, regardless of assets chosen; collective would incur tax on income-producing funds - see the difference
- No capital gains tax on switches between funds
- Makes use of personal tax allowance, leaving CGT allowance free for use elsewhere
- Top-slicing relief available to reduce eventual tax bill
Long-term income and capital erosion
The "gross roll-up" available on offshore bonds means they are better able to sustain regular withdrawals over a period of time without significant capital erosion. Onshore bonds, which are taxed at source, will deplete more quickly.
Example
Investment: £100,000
Annual gross growth rate: 6%
Annual management charge: 1%
Annual withdrawals: £5,000
| Year | Value in fund at year-end/Cash-in value for non-taxpayer | Cash-in value - basic rate taxpayer | Cash-in value - 40% taxpayer | |||
| Onshore | Offshore | Onshore | Offshore | Onshore | Offshore | |
| 10 | £86,860 | £99,247 | £86,860 | £89,398 | £79,488 | £79,548 |
| 15 | £78,146 | £98,711 | £78,146 | £83,969 | £67,517 | £69,227 |
| 20 | £67,595 | £98,029 | £67,595 | £78,423 | £54,076 | £58,817 |
Use our calculator to input your client's details.
Offshore bonds v collectives: the effect of ongoing tax
Many UK collective funds are likely to have an element of interest or dividends within the overall return, even where they primarily target capital growth. Interest arising will be taxed at 20% within the fund and higher rate taxpayers will be liable for a further 20%. Income from dividends will be taxed at an effective rate of 25% in the hands of a higher rate taxpayer.
Because the tax is payable year on year, it acts as a curb on growth, compared with the gross roll-up applying on an offshore bond. The table below shows the effect.
Example
Investment: £200,000
Total net growth rate: 5% p.a.
Higher rate taxpayer
Ongoing values after 5 years
| With interest/dividend element of*: | |||
| 2% | 2.5% | 3% | |
| Collective - income from interest | £245,679 | £243,331 | £241,000 |
| Collective - income from dividends | £249,236 | £247,749 | £246,269 |
| Offshore bond | £255,256 | £255,256 | £255,256 |
*For the collectives, figures assume the interest or dividends are reinvested and money is withdrawn to pay the higher rate tax due. For the bond, it is assumed no withdrawals are made. All figures ignore any product charges.
Use our calculator to input your client's details.
