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What is the 5% Allowance?

One of the main features of using an offshore bond is the ability to take withdrawals of up to 5% of the premium paid each policy year without triggering an immediate tax charge. This is known as the 5% allowance.

What is the 5% allowance?

The Chargeable Events legislation allows 5% of the total premiums paid to be withdrawn from the policy each policy year without an immediate tax charge. A tax liability may still arise but it is deferred until the policy comes to a complete end.

Where some or all of the 5% allowance isnt withdrawn from the policy in one year, it will rollover into the next policy year.

For example if 3% was taken in policy year 1, 7% can be withdrawn in year 2 without an immediate tax liability (2% carried over from policy year 1 + the 5% allowance from policy year 2 and so on).

Regular premium policies

In order to carry out a calculation where your client has a regular premium policy, the 5% allowance is calculated upon the total premiums paid as at the end of that policy year.

Examples of calculating the 5% allowance can be found in our Chargeable Events Q & A.