OFFSHORE FUNDS GROUP
Offshore Porfolio Bonds Products
Offshore personal bonds, or wrapper bonds, have a long and eventful history. They have overcome and succumbed to various attacks by Revenue authorities over the years, and have lived through substantial consolidation and an increasing sophistication in the more mature financial services environments. Yet the basic structure has not changed much and they are still popular products among individuals with substantial amounts of capital to invest.
The attractions of flexibility, administrative convenience and tax efficiency are as attractive today as they have always been. Structured as unit linked insurance contracts, they allow the policy benefits to be linked in value to a wide range of assets such as cash, stocks and shares and collective investment vehicles. Due to punitive taxation, bonds allowing stocks and shares to be selected are not suitable for UK residents, but these individuals can still derive substantial benefits from bonds that are limited to the selection of collective investments and cash.
So what are the attractions of offshore bonds, and why do investors and their advisers still embrace them as the perfect solution to their financial planning needs? I have summarised the main generic benefits below:
Bespoke investment structure
The main benefit of personal bonds is that the investor can create a portfolio of investments within a single investment plan that is tailored specifically to his needs. Due to the wide range of asset links offered within the life wrapper, it is possible to build up a portfolio that is specifically tailored to the investor's individual risk profile and investment objectives. A mix of assets can be selected and reviewed on a regular basis and can be rearranged in accordance with the investor's changing circumstances without the need to change investment vehicle.
For UK investors limited to collectives, the structure allows them to operate a 'multi manager' investment strategy. For example, the investor can mix funds offered by different managers according to where their proven track records rest.
These benefits are particularly relevant to wealthier investors who will expect individually tailored solutions and product flexibility to suit changing circumstances. Many 'vanilla' product structures will therefore not meet the needs of these individuals.
In addition, the investor can appoint a professional investment adviser to select investments on his behalf, thus delegating investment decisions to someone with the skill and expertise to achieve the investor's objectives.
Centralised ownership of assets
The natural diversity of an international investor's portfolio will mean a greater spread of assets held with many different investment houses, across various jurisdictions. Holding investments via an offshore bond centralises the investments in one place. This is important during the investor's lifetime, as he/she only has to deal with one investment house who handle all the paperwork. Furthermore, on death the executors only have to deal with one company, thus simplifying and speeding up the probate process.
Centralising the ownership of assets in this way can also be of great benefit in terms of estate planning. Normally where an individual holds stocks or funds that are registered or domiciled in a jurisdiction other than their country of residence, it is generally known that local probate is necessary in the event of their death. What many people fail to realise, however, is that local estate taxes may also be due on the assets, and there may often be no estate tax treaty between the jurisdiction and the country of residence to protect against double taxation. This situation will apply to anyone who invests in the UK or US stock markets for example. There will not be many international investors who do not have some exposure to these markets in their portfolios.
Investing in these markets through an offshore bond will give these investors the peace of mind that on their death their executors will only need to worry about probate in the offshore jurisdiction, and estate taxes in their country of residence or domicile. An offshore bond in this situation acts very much in the same way as investing in international markets through a company or trust, but at a much lower cost, and without sacrificing any control over accessibility to capital.
Another main concern for wealthier individuals is that they face potentially large tax liabilities that they are keen to legally mitigate in a straightforward way. An offshore bond is the ideal investment for this purpose. In many jurisdictions (e.g. UK and most EU countries) tax liabilities do not arise until money is taken from the bond, allowing capital to grow in the longer term without the value being depleted by annual taxation. In other jurisdictions (e.g. Hong Kong) the benefits may be totally tax-free.
Where assets are held directly by trustees, most tax breaks enjoyed in the past have been gradually eroded by various layers of anti avoidance legislation. Many jurisdictions will look through the trust and tax the settlor or beneficiaries directly. Holding a bond as a trust asset will therefore give back to trustees the tax deferral benefits they previously enjoyed under more benign regimes.
An offshore bond is also a trustee-friendly asset as it relieves many of the accounting and administrative burdens of the trustees, as all administration is carried out by the life company.
So who is actually using offshore bonds in today's marketplace?
The core markets for offshore bonds break down into four main areas: the Far East, Africa, Channel Islands/Isle of Man, and the UK. The benefits I have outlined above will form a common thread of appeal to investors in those markets, although there will be more emphasis on one particular benefit which will differ depending on jurisdiction.
For example, in the Far East and Africa, the fact that a wide range of investments can be held within a single wrapper is the biggest attraction. Investors in these jurisdictions are particularly attracted to the fact that they can gain access to major international markets at considerably lower cost than going direct, and that no local probate or estate duty is due on death.
The Channel Islands and Isle of Man markets consist for the most part of the many offshore trusts and companies domiciled in those jurisdictions. The main benefits for these investors are the administrative convenience offered by bonds, along with tax efficiency for underlying beneficiaries.
The UK market is driven mostly by the tax efficiency of the offshore bond wrapper. Once individuals have used up other tax efficient allowances such as their ISA allowance and CGT annual exemption, offshore bonds are a logical next step for their capital. The bond wrapper allows the capital to grow in a tax friendly environment whilst facilitating tax efficient exit strategies such as the 5% withdrawal allowance, assignment of individual policy segments and breaking UK residence in the future. Investment levels tend to be at the higher end of the market, and many private wealth managers are becoming aware of the real added value the bond wrapper can offer their clients. This has been enhanced by greater clarity on the tax position of bonds, as well as the demise of other more traditional tax deferral vehicles as a result of an increasing array of anti-avoidance legislation.
Once perceived as expensive, another noticeable trend in recent years is the steady decrease in the costs of offshore bond wrappers. Life companies and their professional advisers are increasingly harnessing the power of technology in innovative ways, which streamlines costs, thus offering greater value to the investor in the form of transparent charging structures and economies of scale.
As onshore financial services companies continue to merge and buy mass market share, the products that they offer will become increasingly inflexible with nothing to differentiate them from each other. In this climate, wealthier investors will be seeking flexible, tax efficient solutions to their more complicated needs, many of which can be met by offshore bond wrappers. Advisers active in this market can expect to gain from this
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These products typically offer a choice of charging structures the efficacy of which often depends upon how long you expect to remain invested. We would be happy to provide you with details of the standard charges and the substantially reduced costs when you invest in these products using us as your introducer.
Fully personalised portfolio bonds allow the inclusion of virtually any asset provided that it is traded on a recognised exchange. If you are British, do not invest in this product if you intend to reside back in the UK.
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