Understanding the offshore insurance bonds tax position in the country where you are resident is very important.
The offshore insurance bonds tax position is often compared to those benefits received in the UK. For example, people are told about the 5% withdrawal of initial income as “tax-free” and also about death benefits for beneficiaries, or they are sold as a platform to hold investments for non-UK residents.
Offshore Insurance Bonds Tax Position – France, Spain, Italy and the USA
However, the oft-heralded ‘tax efficiency’ or ‘tax deferment’ benefits on a lot of expat advice websites need to be scrutinised in detail.
The key understanding is that, in some jurisdictions, these products are just not recognised unless they are designed as compliant with the local tax rules. For example, this includes some pretty important expat locations including the USA, France, Spain, and Italy to name a few. However, there are many other EU countries where there is NO tax advantage for holding offshore insurance bonds.
In areas such as these, the local tax offices will look straight through them and are likely to tax income and gains on an ongoing annual basis- especially where there is input on the investments from a fund adviser or self-selection of funds.
What should I do as an expatriate holding an Offshore Insurance Bond?
If an offshore insurance bond is not designed as tax compliant in a given jurisdiction, tax advice should be sought locally. In fact, that should always be the case anyway.
Pension Holdings – Offshore Insurance Bonds Tax Position
We have been consistent in our view that offshore insurance bonds serve little to no purpose within pensions and particularly not within UK pensions. Any tax advantages will be provided by the pension itself, its location, and the Double Tax Treaty applying at the time.
Ultimately, an offshore insurance bond provides no tax advantages within a pension.
Ownership and Life Assured – General Points (not within a pension)
Assuming that the offshore insurance bond is deemed compliant then there is some generation planning that can be applied.
Sole Owner- Sole Life Assured
This is where a person owns a bond in their own right. On death of the sole owner, the ownership, or proceeds of the bond will pass to their estate, and be dealt with by the legal personal representatives.
Joint Owners- Joint Lives Assured
This allows the investment to continue because if one of the joint owners dies, the ownership of the bond will transfer to the survivor.
Offshore Insurance bonds come to an end with the last life assured dies(assuming the owner(s) have not cashed in the investments before then).
In the UK, there is insistence on Insurable Interest and so this needs to be checked before adding other lives to be assured. This is to prevent someone with no interest between the owner and the life assured profiting on death. There is unlimited insurance interest between spouses and civil partners.
Single Owner- Joint Lives Assured
While the bond continues after the death of the owner- who owns the bond now? Well, in this case, it goes to the owner’s legal representatives and is governed either by a will or the inheritance rules of that country. If the remaining life assured is expected to be able to benefit on the death of the owner, then the way in which the bond is set up and applied for is very important. It could be encashed and the proceeds are paid to the survivor or the bond could be assigned to the survivor. But, it is also possible that the proceeds go to other family members!
Beware of Personalised Bonds upon returning to the UK (and be aware of Time Apportionment Relief)
Summary
An offshore insurance bond’s tax position is often misleadingly linked to benefits that only apply in the UK. Further, some advertised benefits can actually lead to further taxation problems for you if you live outside the UK, or if you return to the UK without checking first what type of offshore bond you hold and whether it is “compatible”.
While offshore insurance bonds have been the ‘staple’ recommendation to British investors abroad for a number of years, this is often for three reasons:
- They come under Insurance Intermediation rather than Investment Mediation, and many of the advisers (90%+) have not actually held relevant investment qualifications, nor regulation (so they cannot recommend anything else).
- Commission – Offshore insurance bonds pay high commissions to adviser companies – typically between 5% to 8%.
- Following on from point (1), non-investment qualified advisers have then been able to recommend non-regulated products (or Professional-Only products like Structured Notes) which regulated investment advisers would not recommend.
The tax position and the local rules are rarely discussed at the point of investment, possibly leaving the investor exposed to future unknown tax penalties. Further, it may not be clear what happens on the death of the policyholder and the ongoing ownership rights of the remaining non-UK resident spouse.
If you have an investment bond (even if it is in a pension ) it would be a good idea to review what you have and the tax and succession rules that will apply- or there might be serious problems around the corner.
Contact us for guidance or advice as we are more than happy to consider investments taken out previously, and we often are able to help people improve their position and reduce high charges.
Article Date 6th April 2021
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Aisa International, s.r.o. is a wealth management firm with an award-winning team who provides investment advice, financial planning, and asset management for U.S., U.K., and E.U. expatriate citizens residing abroad. Holding all current regulatory licenses, including the FCA license in the UK and the Investment Licence in the European Union, Aisa International is uniquely qualified to provide personal financial advice for U.K. pensioners living outside of the U.K. Headquartered in Prague, Czech Republic, Aisa International serves its global clients where they reside through its OpesFidelio network of highly-qualified advisors. For more information, please visit www.asiainternational.cz.
The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not except any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.
