onshore vs offshore

hi all

I may be taking an overly simplistic view of the situation here, but could someone please clarify.

Other than the annual product charges, what reason is there to use an onshore bond as opposed to offshore.

If the bond is deemed to have paid c20% tax, if the client encashes as a non tax payer, he will either pay 0 or 20% tax… so either worse off than the onshore bond or better of.

If they are 40% tax payer they have already paid 20% and will need to pay another 20% on encashment… i.e 40% in total.

I know there are some marginal differences in terms of top slicing etc, but can someone add some guidance… maybe an article on the matter or a worked example

Thanks

Comments

  • benjaminfabibenjaminfabi Moderator
    edited November 22
    Hi Patrick

    I find it easier to start with the onshore bond, which is lower cost, and find reasons to use a more expensive offshore alternative.

    These include:

    Greater tax efficiency for nil and starting rate taxpayers
    Gross roll up in the fund
    Open architecture for investment options

    Offshore should perhaps be the default option for discretionary trusts that include child beneficiaries, and for non domiciled individuals.

    If you have a UK resident client, who is and always will be at least a basic rate taxpayer, with the fund ranges available in many onshore bonds today, this should be the starting point simply because the increase in costs is usually significant for no material benefit.
    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • Thanks both.

    This is a rather large investment and whilst cost is a factor it’s marginal in this case and the client may be a nil rate payer in some tax years and/or will assign to grand children to encash. So that’s part of the rationale
  • @benjaminfabi said:
    Hi Patrick
    Offshore should perhaps be the default option for discretionary trusts that include child beneficiaries,

    Why's that?

  • JonaJona Member

    @arongunningham Tax treatment and reporting.

  • Reporting is the same onshore and offshore isn't it?

  • JonaJona Member

    Sorry; it's the way Trusts have to deal with the taxation, differing between relevant and non-relevant property trusts.

    Distributions from discretionary Trusts to minor children is most likely to be effective via the offshore route via assignment as kids will have full PA, PSA, Starting Rate band to use against the surrender once in their hands.

    ..............is what I think @benjaminfabi was getting at. Could be wrong.

  • The cost comparison, i'd like to learn more about.

    You maybe (and I'm not sure if it's even true) pay more for offshore but have the benefit of gross roll up. These two factors can probably be compared side by side and provide a net benefit onshore or offshore.

    In relation to costs, and hence returning here, I've just received a quote for £120 per quarter offshore, which is 0.048% - I'm sure this is competitive versus onshore, even despite the 0.55% initial fee.

  • JonaJona Member

    Didn't Pru have a calculator for this - comparison of UT v On Shore v Off?

  • Is that the only fee though? I'm sure they'll have additional ongoing admin fees?

    Most offshore bonds have at least 3 different charging structures to 'choose' from (read ' be confused by'!) and they nearly always include a quarterly £ fee and an annual % or £ fee in some combination. Add fund and custody fees and I'll be very surprised if it is cheaper than an onshore bond.

    Add in the fact that if they're a UK resident and at least basic rate taxpayer with income above the starting rate, there is a headache factor created with paying the tax due on offshore gains that needs to come into play. Plus with onshore you're always carrying through a credit for BRT in the investment, whatever the future basic tax rate is. If br tax is increased to, say, 25% in 2027 for example, the onshore bond still gets the full credit for it, but the offshore pays a top slice on the 25% rate.

    In my opinion, there is never going to be a big enough cost saving in going offshore to outweigh an onshore bond for most use cases.

    Your % calculation suggests a £1m investment premium? If this is the case, then is it possible that this money will sit in the bond and never get used by the investor, ultimately perhaps being gifted? If so, this is the angle to take to justify offshore, with additional lives assured and a wider remit for considering the suitability of the investment, in order to make a personal recommendation (COBS 9.2.2).
    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • Yeah thanks this is handy, I've used it before.

    The issue with that is it doesn't include the ongoing charges of each - but with the information you can include Offshore > Onshore > Collective, in my case.

  • @benjaminfabi said:

    Your % calculation suggests a £1m investment premium? If this is the case, then is it possible that this money will sit in the bond and never get used by the investor, ultimately perhaps being gifted? If so, this is the angle to take to justify offshore, with additional lives assured and a wider remit for considering the suitability of the investment, in order to make a personal recommendation (COBS 9.2.2).

    This is very close to the scenario we are going through Ben, and our provider of choice only charges £240 per annum with no other charges for the investment and we have grandchildren who will encash within PA... which was our reasoning behind it.

  • Which provider?
    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
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