Tax Issues Fuelling UK Investor Interest In Offshore Bonds

by Robert Lee, Tax-News.com, London

07 June 2006

Strong interest in both offshore and onshore bonds from UK investors is likely to continue in the foreseeable future as rising house prices, the EU Savings Tax Directive and emigration fuel a greater need for tax planning.

According to a review of this market by Defaqto, a leading financial research company, in 2005 alone there was an 18.5% increase in sales of onshore bonds compared to the previous year.

The bond industry is at the forefront of providing trust solutions for estate planning and is now more important than ever following the Treasury’s proposal to extend the Inheritance Tax net to cover certain types of trusts, the company says. This potentially retrospective change combined with the rapid acceleration of house prices over the last ten years means more people are in need of financial advice in the area of estate and inheritance planning.

Defaqto believes that a main driver of the offshore bond market is the increase in overseas migration of UK citizens over the past ten years and the expectation of continued growth in the future. The international portability of Offshore Bonds makes them an investment vehicle of choice for a rapidly growing band of soon-to-be expats, says Defaqto.

“Bonds offer so many advantages in financial planning that I am not surprised that the market is powering ahead. The ability to switch investments within a Bond with no Capital Gains Tax issues is one of the key reasons why Bonds are a useful investment vehicle for tax planning," noted Fraser Donaldson, Head of Investment at Defaqto.

Mr Donaldson observed that rising property values mean that estate planning is no longer a problem just for the very wealthy.

"While onshore bonds are the bulk of the market, offshore bonds sales are growing faster as they overcome customer and adviser perceptions of high price. Rather ironically, given that they are aimed mainly at wealthier individuals, Offshore Bonds are at their most tax efficient for nil and lower rate tax payers," he noted.

"They are a particularly useful vehicle to help mitigate tax for those planning to spend some or all of their time living outside the UK," Mr Donaldson explained.

Another important factor driving interest in offshore bonds is the European Savings Tax Directive, under which signatory countries (EU member states and a number of offshore dependant territories) share information on the savings income in their country earned by investors living elsewhere.

Instead of sharing this information, some territories have opted to apply a withholding tax in this income, including Jersey, Guernsey, the Isle of Man, and three EU member states, Austria, Belgium and Luxembourg. However, there are many types of investment vehicle that are not included in the legislation, one of them being bonds.

While investors in bonds must still pay tax on the proceeds when a bond is cashed in, income does not usually have to be declared to the tax man on an annual basis, meaning that offshore bondholders are earning money that would otherwise have gone to the Revenue.

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