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Offshore life policies
A policy taken out with a non-UK insurance company is a highly tax efficient savings vehicle, provided the policy is not what the tax authorities would regard as a highly personalised bond where the investment return within the policy can be rolled up tax free. Tax only arises at the point at which the policy is surrendered or matures, and then only if the policyholder is UK resident at the time.
In addition, a tax free annual withdrawal of up to 5% of the initial capital is available, thereby generating an effective tax free income steam.
Non-UK domiciled policyholders are not required to pay the £30,000 additional remittance charge (even if otherwise appropriate) in order to enjoy the benefits of gross roll up or 5% withdrawal described above.
Case study
Mr Osborne is a non-UK domiciled but UK resident investing in offshore life policies
- Mr Osborne is a non-UK domiciled individual who has lived in the UK for more than seven consecutive years. Consequently, he is required to pay the £30,000 annual remittance charge in order to avoid paying UK income tax on his foreign income except to the extent the amount is “remitted” to the UK. Mr Osborne’s only foreign capital is £400,000 which he wants to invest in a tax efficient manner. Clearly, paying the annual charge will not be economical for Mr Jones.
- Mr Osborne places the foreign capital, totalling £400,000, in an offshore bond which matures in 20 years’ time. This allows him to make an annual withdrawal of five per cent (£20,000) of the initial value of the bond tax free, even if the funds are brought into the UK. Any gains or income arising within the bond are not subject to tax in the UK so long as the bond remains in existence and he does not withdraw more than five per cent of the initial premium annually.
- Mr Osborne will pay UK income tax when the bond matures, is surrendered at a rate of 40% (assuming he is a higher rate tax payer and remains UK resident).
- The bond matures after 20 years and the value of the bond on maturity is assumed to be £800,000.
Example of Mr Osborne's tax liability
| Amount | UK tax payable |
Annual withdrawal of 5 per cent | £20,000 | nil |
Maturity of the bond (maturity value assumed to be £800,000 of which £400,000 is the original capital) | £400,000 | £160,000 |
- However, if Mr Osborne owns the bond via an offshore company then he can sell the shares in the company immediately prior to maturity of the policy. This avoids the income tax liability on maturity. The sale of shares would be a chargeable gain and, therefore, subject to capital gains tax at a rate of 18 per cent.
Example of Mr Osborne's tax liability if an offshore company is used
| Amount | UK tax payable |
Sale of the offshore company (gain on the company assumed to be £400,000) | £400,000 | £72,000 |
- Alternatively, if the gain were high enough Mr Jones can avoid CGT by not remitting the proceeds to the UK and paying the £30,000 annual charge.
| Amount | UK tax payable |
Sale of the offshore company (gain on the company assumed to be £400,000) | £400,000 | £72,000 (or £30,000 if the remittance basis is claimed) |
- It is worth noting that if Mr Osborne leaves the UK before the bond matures, he can surrender the bond without having to pay any UK tax. (If this option is to be followed there is no requirement to hold the bond through an offshore company.)
The information above should not be construed as the provision of tax advice. We are not qualified to provide tax advice and recommend that you seek advice from a professional tax adviser. Levels and bases of tax referred to above are those applying under legislation in force at the time of writing the relevant article. These levels and bases may change and the availability and value of any tax relief will depend on your individual circumstances.
