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Offshore boost from probable rise in CGT

With the worst of the global financial crisis hopefully behind us, the industry must now move on and look to the future. That future, according to various news outlets, is likely to be one where capital gains tax (CGT) rises.

If a rise in CGT turns out to be the case, and CGT shifts from the 18% flat rate to upwards of 50%, then some adviser objections to offshore bonds may melt away and planning opportunities present themselves once more.


Naturally it would be prudent to see exactly what the new Finance Bill has in store before casting judgement, but it is likely we may see investors who are currently holding collectives directly, realising any gains and looking towards offshore bonds as a planning opportunity.


The following case study serves as a reminder of how RL360° products and services can help provide your clients with appropriate solutions.


Case study

Philip, a company director aged 50, is resident in the UK and is 15 years away from retirement. Despite the economic conditions, Philip’s company has performed particularly well and he has received a sizeable bonus.


Philip was initially considering placing his £200,000 bonus into his pension scheme, but that would have taken him above the £255,000 annual allowance for 2010/2011. As an alternative, Philip has been thinking about building up a portfolio of directly-held collectives. Philip decides to contact his financial adviser to discuss the situation in more detail.


Philip is aware that the current rate of CGT at 18% is much lower than his income tax rate. Philip’s adviser explains that he could opt for holding a portfolio directly, but with the new coalition Government in the UK it is unclear for how long the CGT rate of 18% will remain.


His adviser explains that there is a good chance of the rate rising in the not too distant future to 40%, or even 50% for those individuals with incomes in excess of £150,000. As such he suggests that Philip may wish to consider an offshore bond, in particular the Select offshore bond from RL360°.


Philip is curious as to how this might benefit him. His adviser points out the following:


° He can build a portfolio of investments within the offshore bond, just as he could do directly (with the exception of certain investments such as shares which would make the policy highly personalised)


° The portfolio would grow virtually tax free (except for any withholding tax deducted at source)


° He can hold cash deposits within the bond


° No tax would be payable on switching investments within the portfolio


° He will be able to withdraw up to 5% of the premiums invested each policy year without an immediate charge to income tax (for up to 20 years assuming the full 5% is taken every policy year from inception)


° The bond can be structured with multiple sub-policies, which can then be assigned, for example, to a lower tax-paying spouse in order to reduce the income tax liability on any gain


° He can plan for the future and protect against UK Inheritance Tax (IHT) with a trust such as a discounted gift trust.


Philip’s adviser asks him a simple question: “If you could choose to defer tax, rather than paying it now, would you?”


His adviser continues to point out that if Philip is looking to take an income from his investment as a way of topping up his existing salary, he can make use of the ability to take 5% tax-deferred withdrawals each year from the offshore bond. Better still, should Philip choose not to make use of his allowance in any given year, the allowance rolls forward on a cumulative basis.


Philip acknowledges that this could be particularly useful in the coming years as his youngest daughter recently announced her engagement. So, in a couple of years Philip is likely to require a substantial lump-sum to cover wedding expenses! Assuming that Philip does not take any withdrawals in the first two policy years, he will have 15% of his total premiums to withdraw during the third policy year, which would equate to £30,000.


Philip is also impressed that he can hold cash deposits within the bond. This means he will be able to transfer out of riskier equity-based funds and into cash if markets should start to take a downward trend. This could potentially allow him to preserve capital as he approaches retirement.


Philip is also keen to know more about the Select Discounted Gift Trust (DGT). His adviser explains that in the future, should the need arise, Philip could place his Select bond into the DGT (which can be arranged after the initial setup of the Select policy). This could help Philip mitigate UK IHT and avoid the costs and delays associated with Manx Probate, increasing the monies available to beneficiaries upon his death.


Furthermore, Philip would continue to receive an income for life (or until the trust has been exhausted). There is also the benefit of an optional access fund*, which is a unique benefit offered by the Select DGT, and of course a reduction in UK IHT payable on death by virtue of the gift being discounted.


Most importantly Philip’s adviser brings him back to the question of CGT: if it should be revised upwards, Philip could be faced with a potential 50% tax on any gains realised on investments held directly, whereas using an offshore bond, the tax would be deferred and gains could be taken at a much later date when Philip is in a lower income tax bracket.


Conclusion

Select offers a flexible structure that can adapt with your clients’ ever-changing needs, whilst providing proven tax mitigation.


Please get in touch with me to find out more about Select and the Select DGT before the proposed CGT changes take effect.


* RL360° believes that the access fund is a unique proposition when compared against discounted gift trusts offered by other offshore life companies. Scott Grant from Clear Financial Advice stated in his review of the Select DGT in ‘Financial Adviser’ on 29 April 2010, “It is a new thing in the market and in some ways overdue. On face value it does differentiate them from the competition”.


Important notes

Please note that every care has been taken to ensure that the information provided is correct and in accordance with RL360°’s current understanding of the law and Her Majesty’s Revenue and Customs (HMRC) practice as at April 2010. You should note however, that RL360° cannot take on the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HMRC practice are subject to change.


While this case study highlights potential opportunities for planning, it is not intended to provide an exhaustive analysis of all the opportunities or pitfalls.