Personalised Portfolio Bonds

Personalised Portfolio Bonds (PPBs), often simply known as Offshore Bonds, have a place in the toolkit of all Independent Financial Advisers (IFAs) providing advice to expats that need to move from country to country, and who require a wide range of investments and various tax benefits. PPBs can provide deferred tax planning and this is where Offshore Bonds provide solutions. There can be pitfalls, however, which are covered in this piece.

A PPB is a Life Assurance or Capital Redemption policy that provides investors with the freedom to invest in a wide range of assets. These assets could include different risk-rated investment funds and cash deposits, as well as individual equities quoted on any recognised exchange, and both corporate and government treasury bonds. It is also possible for your IFA to appoint a Discretionary Fund Manager to manage your portfolio on a “daily basis”

What are the Benefits? 

Bear in mind that residency issues should be looked at on an individual basis. That said, there may be a small amount of withholding tax on some of the income-producing investments but the funds benefit from gross roll-up. As the funds do not suffer large tax charges, the benefits are rolled up to give greater potential growth than taxed funds.

There is a saying that ‘tax deferred is tax saved’. Of course, there will be a time when the policyholder could be asked to pay some tax. However, tax deferral allows the policyholder to decide when to pay the tax.

KEY POINT

It is the Life Assurance company rather than the Policyholder that owns the property, which in turn determines benefits payable under the life assurance or capital redemption policy. As the policyholder has the ability to select the property that determines the policy benefits, the policyholder retains nearly all the advantages of direct personal ownership of the policy.

As the property is held in the wrapper of a life assurance or capital redemption policy, the policyholder does not have to pay tax on dividend and interest income arising from either the investments or capital gains tax on disposals when the investments underlying the policy are altered.

ANOTHER KEY POINT

An expat who returns to the UK with a Personalised Portfolio Bond must make changes to the bond or be liable to a deemed 15% per annum increase, even if no gains are being accrued.

There are a variety of ways of dealing with the problem, including changing the status of the bond so it does not fall within PPB rules.

If the taxpayer is living in a low tax/nil-tax jurisdiction, PPBs will have a considerable advantage over other products.

There can only be an income tax liability when a ‘chargeable event’ occurs in the following circumstances:
• when the sole or last life assured on the policy dies;
• when the bond is surrendered or a segment of the bond is surrendered;
• if the policy is assigned for money or money’s worth; or
• if more than the cumulative 5% of total premiums paid allowance is withdrawn in any given policy year.

Money can be extracted from an Offshore Bond through ‘partial encashment’ and ‘surrender of segments’. There are some very important tax implications to consider when deciding which method to opt for.

Time is of the essence

When a policyholder has had tax residence outside the UK, a chargeable event gain can be reduced to reflect this period of non-UK residence. This is known as time-apportionment/non-resident relief.

Offshore policies issued by a non-UK resident Insurer after 17 November 1983 are eligible for time-apportionment relief.

The gain is apportioned using the formula A ÷ B, where A is the number of foreign days in the material interest period and B is the total number of days in that period. It is important to look at the definition of foreign days and material interest carefully.

From 6 April 2013, time apportionment relief can apply to new policies issued by UK-based Insurers on or after that date. These are varied on or after 6 April 2013 in such a way that results in an increase in the benefits secured, where such a policy is assigned from one individual to another or into or out of a trust.

However, one of the overriding attributes of these vehicles is the simplification of tax, particularly for an annual tax return.

Are you an Expat? Got one of these? If not, contact me for help/advice to see if it could be good for you!

 

GREG POGONOWSKI

www.yourmoney-matters.net

email: greg@yourmoney-matters.com