Investors look to offshore havens to beat austerity measures

To protect pensions and legacies savers move to foreign bonds. Wealthier British investors are piling money into offshore bonds, in a bid to escape punitive new taxes on pensions, and to help with inheritance tax planning according to Emma Simon, The Telegraph.

According to L&G – one of the largest insurers in the UK – its offshore bond business grew by almost 50 per cent in the past three months. This is on top of record sales in 2010, which saw sales rise almost five times on the previous year. While Standard Life in an annual results said it had seen sales soar by a third this year.

One reason for these rises has been the recent change which has limited how much people can save into a pension each year.

But a rise in Capital Gains Tax (CGT), and a freezing of the Inheritance Tax (IHT) allowance has meant more investors are looking at ways to minimise tax charges on their investments.

People are now only able to save £50,000 a year into a pension. Danny Cox, of Hargreaves Lansdown said: “This limit is still clearly more than most people can afford to save each year. But it does mean that once high earners have maximised their pension and Isa contributions, then offshore investment bonds become an option.”So what are the advantage of going offshore? Do they allow richer investors to effectively sidestep tax?

The answer is no. Offshore bonds don’t allow you to avoid tax completely, but they can be a good way of deferring it. This can be particularly beneficial to those who are higher-rate taxpayers today, but expect to be basic-rate taxpayers when the investment is cashed in.

As well as allowing investors to choose when they pay tax, some of these bonds will also allow investors to choose whether returns are taxed as income, or capital gains. With careful tax-planning this can help them minimise overall tax bills.

In many ways offshore bonds are similar to onshore bonds. Both are basically wrappers, sold by insurers, through which consumers can invest in a range of investment funds.

They offer a wide range of externally managed investment funds – typically the same choice as people would get when investing in an Isa or unit trust. On offshore bonds there can be an even wider spread of investments, including many not widely available to UK investors.

One of the main advantages is that both offshore and onshore bonds allow customers to withdraw 5 per cent of their investment each year tax-free (although strictly speaking the tax is deferred until the bond is cashed). For retired investors and those looking to produce an income from their investment this can be an extremely attractive option.

The main difference between onshore and offshore bonds, is that with offshore, gains can roll-up tax-free – which should mean higher returns. The downside is that charges may be higher (though the charges on both on and offshore bonds are broadly similar) and that investors may not have the same protection under the Financial Services Compensation Scheme.

See more in the Telegraph here.