Offshore bonds - tax benefits

Your investments within Prudential International have the advantage of being tax-efficient.

Gross roll-up

The main tax benefit of investing in an offshore bond is gross roll-up.

Gross roll-up means that any underlying investment gains are not subject to tax at source - apart from an element of withholding tax.

With an onshore bond, life fund tax is payable on income or gains made by the underlying investment. This means your offshore investment has the potential to grow faster than one in a taxed fund.

Note that the value of your investment can go down as well as up and is not guaranteed and you may not get back the full amount of your investment.

Tax planning benefits

• Deferring tax if you're a taxpayer

  As with an onshore bond, you can benefit from tax deferral - an income tax charge will not arise until the bond is partly or wholly cashed in or more than the 5% tax-deferred allowance is taken out.

  If the bond is partly or wholly cashed in or more than the 5% allowance has been taken out, any UK personal tax may be minimised if:

  • You wait until you become a non-taxpayer before doing this, or
  • You move abroad and become non-UK resident for tax purposes before doing this.

  Note that corporate investors do not enjoy the same 5% deferred tax allowance.

• Non taxpayers As a non-taxpayer you can take money out of your bond and any investment gains within your personal allowance will be free of tax.

  If you are in a couple and one partner is a non-taxpayer it can be tax-efficient to have an offshore bond in their name or to assign it to them. An assignment to a spouse or civil partner is normally exempt from inheritance tax.

• Time apportionment relief

  Under time apportionment relief, the chargeable gain on an offshore bond will be reduced in proportion to any time you've been resident outside the UK. For example, if you're a non-UK resident for half the time the bond is held, the gain would be reduced by half.

• Top slicing relief

  This can potentially reduce the income tax liability if you move into a higher tax bracket as a result of a chargeable gain.

Inheritance tax planning

• Assigning a bond in a trust

  If a bond has been set up in a discretionary trust and the trust is to be wound up, it may be more tax-efficient for the trustees to assign the bond to the beneficiary, rather than cashing it in and paying out the proceeds.

  If the bond is assigned, the tax will fall on the beneficiary, which will save tax if they are anything other than an additional rate taxpayer. If the bond were cashed in within the trust, it would incur tax at the trustee rate, which is currently 50%.

• Capital redemption basis

  This means there will be no life assured, so the bond can be continued (for up to 99 years) until the most convenient time to cash it in - possibly across generations. This can be very attractive for trustees.

• Offshore life assurance policies

  A policy can be arranged to cover an anticipated inheritance tax bill and put into trust. Because the underlying funds grow largely free of tax, the premium cost may be lower than for a UK-based policy. Plans can be on a regular or single premium basis.

  Take action

  • For more information on investing with Prudential International speak to your financial adviser. They may charge for advice. If you don't have one, find an adviser here.
  • Read our guide to investments.

  This is based on our understanding, as at September 2011, of current taxation, legislation and HM Revenue & Customs practice, all of which may change without notice. The impact of taxation (and any tax relief) depends on individual circumstances.

  Offshore is a common term that is used to describe a range of locations where companies can offer customers growth on their funds that is largely free from tax. This includes "true offshore" locations such as the Channel Islands and Isle of Man, and other locations such as Dublin - where Prudential International is registered. Tax treatment can vary from one type of investment to another, and from one market to another.