For Adviser Use OnlyNot Suitable For Use With Clients

When offshore bonds?

Richard Leeson

Head of UK Business Development, Prudential International

When?

Not if or why

Case for offshore bonds is stronger than ever- traditional advantages still apply- new opportunities post-Finance Act 2009

Suitable for a range of client profiles

Income investors: 5% withdrawals

Long-term withdrawals: retirement, DGT/ Loan Trust

Gross roll-up: better able to sustain long-term withdrawals

Break-even growth rates at 1% AMC*:- 6.061% offshore- 7.347% onshore

Year Fund value at year-end

Offshore bond Onshore bond

1 £199,880 £197,801

3 £199,622 £193,142

5 £199,338 £188,113

10 £198,495 £173,720

15 £197,422 £156,292

20 £196,057 £135,190

Assumptions:

Initial investment £200,000

Withdrawals p.a. 5% of initial investment

Gross growth rate p.a. 6%

Annual management charge p.a. 1%

Onshore life fund taxation p.a. 17.5%

*For 5% annual withdrawals

http://www.pruadviser.co.uk/content/pruinternational/consider/longterm/

Non-taxpayers: assignment

Non-taxpaying spouses/partners:

Can withdraw tax-free within personal allowance

Can take 5% withdrawals + personal allowance, then reinvest personal allowance- withdrawals create chargeable gains – but no tax- enables increasing withdrawals over time, as reinvestment increases 5% allowance- creating chargeable gain each year reduces the eventual gain on cashing in

Assumptions:

Initial investment £200,000

Growth rate p.a. net of AMC 6%

Tax allowance growth rate p.a. 3%

Age at outset 55

Cashed in at start of year 6

No product charges included

Total net withdrawals £53,336

Cash-in value £207,735

Chargeable gain at cash-in: £26,694

http://www.pruadviser.co.uk/content/pruinternational/consider/nontax_payer/

Non-taxpayers: early retirement

Can cash in tax-free where gain is within personal allowance Client invests £200,000 at age 55 Takes early retirement at 60 Bond now worth £267,645 (end of year 5, before any withdrawals) Cashes in 2 segments a year, using personal allowance to offset tax on gain

Total withdrawals over 5 years = £150,874 Total tax paid = £2,541 Year 10: client reaches 65 and takes pension

Assumptions:

Initial investment £200,000

Growth rate p.a. net of AMC 6%

Number of segments 20

Tax allowance growth rate p.a. 3%

Full personal tax allowance available

No product charges included

http://www.pruadviser.co.uk/content/pruinternational/consider/early_retirees/

Non-taxpayers: moving abroad

Onshore bond suffers tax at source – cannot be reclaimed/offset against local tax

UK collective liable to CGT if away for less than 5 tax years

If away for one full tax year, can cash in offshore bond with no UK tax*

If returning to UK, time apportionment relief

Could be:

Clients with property abroad – moving at retirement

High earners – escaping 50% tax rate

*There could be local tax in the country of residence.

http://www.pruadviser.co.uk/content/pruinternational/consider/abroad/

Trusts

Higher tax rates on accumulated income from April 2010

50% on interest, 42.5% on dividends

Annual tax returns accounting costs

No income if invested in bonds – so no tax and no tax returns- but can still take 5% withdrawals if required

Loss of personal allowance

Applies where income is over £100,000

£1 allowance lost per £2 income above the limit – until whole allowance is lost

60% marginal tax rate:- taxed on £2 income + £1 lost allowance- tax on £3 at 40% = £1.20- £1.20 tax on £2 income = 60% marginal tax rate

Only applies to earned income/investment income taxed as earned income

5% withdrawals from a bond don’t count

http://www.pruadviser.co.uk/content/pruinternational/consider/higher_earners/

Loss of personal allowance

Example: £100,000 earned income + £100,000 invested in UK corporate bond UT- 5% annual interest £5,000 income over the limit- £2,500 personal allowance lost- effective tax paid on £5,000 = 60% = £3,000

Switch £100,000 into offshore bond, in UK corporate bond fund- no immediate income tax - no loss of personal allowance- no tax within fund

http://www.pruadviser.co.uk/content/pruinternational/consider/higher_earners/

High earners: pension tax relief

Restriction of relief for high earners:

Relief tapered away from £150,000, to 20% over £180,000

“Anti-forestalling” measures in 2009/10 and 2010/11

http://www.pruadviser.co.uk/content/pruinternational/consider/high_earners/

High earners: pension tax relief

£1,000 gross contribution will cost £800 net instead of £600 net

Combined with 50% tax rate, equivalent to £1,600 pre-tax income, compared with £1,000 at present

Offshore bonds as a complement/alternative to pensions:- loss of up-front tax relief will be less significant- for clients retiring abroad, could be outweighed by having no UK tax on proceeds

http://www.pruadviser.co.uk/content/pruinternational/consider/high_earners/

Non-doms

Post-2008 tax change

Client transfers offshore funds into an offshore bond

Taxed on the arising basis:- avoids £30,000 remittance charge- retains personal tax allowances

No tax within bond except withholding tax

Fully portable if client later moves abroad

If client stays in the UK, can put bond into Excluded Property Trust:- protects assets from UK inheritance tax- allows full access at any time

http://www.pruadviser.co.uk/content/pruinternational/consider/non_doms/

Technical help

http://www.pruadviser.co.uk/content/pruinternational/consider/

Technical help

Important notes

Offshore is a common term that is used to describe a range of locations where companies can offer customers growth on their funds that is largely free from tax. This includes "true offshore" locations such as the Channel Islands and Isle of Man, and other locations such as Dublin – where Prudential International is registered. Tax treatment can vary from one type of investment to another, and from one market to another.

All references to tax are UK tax only. Non-UK residents may be subject to tax in their country of residence.

Prudential International cannot and does not give tax or legal advice and cannot accept liability for any loss suffered by any person as a result of action taken or refrained from on the basis of the material in this presentation.

The registered office of Prudential International is in Ireland at Montague House, Adelaide Road, Dublin 2.

www.pruadviser.co.uk/international