Portfolio



Over the medium and longer term, the growth from a balanced portfolio of stocks, hedge funds, ETF’s and mutual funds and bonds has exceeded that achieved by bank deposits. However, maintaining and managing a portfolio can be a huge task; an investor is constantly faced with the twin problems of how to maximize investment returns and how to do so with the minimum of complications, expense and time-consuming paper work. An Offshore Portfolio Bond provides an answer. It can hold most of your worldwide investments in one place making for ease of administration, cost savings and tax efficiency. Offshore Portfolio Bonds are administered by long established Insurance companies experienced in dealing in the world stock markets. Such companies are based in the tax havens of the Isle of Man, the Islands of Jersey and Guernsey, and Luxembourg.

Offshore Portfolio Bonds provide the more independently-minded investor with the opportunity to hold a portfolio of assets, the scope for investment is very broad and by avoiding over-dependence upon one market, sector or country, investment risk is reduced. You can thus make use of investment opportunities as they arise, switching asset classes, countries and sectors, and moving from an aggressive to a defensive stance as conditions suggest. But, you might say, where, as a non-professional, would you find the time to do all the research and make the decisions? (Even if you are a professional we can act as the sounding board and facilitator for the actions required – one call or email and it is done.)

The burden of making investment decisions can be overcome with the appointment of a professional investment adviser who should have access to the latest information on markets and trading conditions, enabling a quick response to market changes and trends in order to maximize the earnings potential of the portfolio.

By setting up or transferring a portfolio of assets to an offshore insurance company in return for the issue of an Offshore Portfolio Bond, the direct link between yourself and your investment is cut. Furthermore, under the local laws of the offshore tax haven, there is no legal obligation on the life insurance companies domiciled there to report investments held with them to anyone. You can therefore invest with complete confidentiality. This factor has three important consequences. It increases your level of privacy. It increases your protection against losing frivolous law suits, since not only will your assets not be under the jurisdiction of the awarding court, they will in fact be invisible (investments currently in an investor’s home country can be transferred into the Offshore Portfolio, achieving confidentiality). And it gives you tax advantages. Section 739 UK friendly; Also in various countries it allows you to trade and gross rollup all capital gains as you are not taking anything out of the wrapper. In essence it gives you tax timing choice which if done correctly means it is likely to legally avoid Capital gains taxes.  (There is a USA version of this as well.)

But wait you say – stop! If the assets belong to the insurance company, and the link between yourself and your assets is cut, how can you prove they’re yours? Isn’t it unsafe? An offshore portfolio bond is a life insurance policy which is worth precisely the value of the assets you have instructed the life insurance company to place within it. The assets are with custodian banks with high risk-quality ratings, so they themselves are safe. The life insurance companies themselves typically have a history of 150+ years and US$100bn+ under management. Plus the tax havens where they are domiciled have either voluntary lifeboat agreements among all members of the life insurance industry working there, or are subject to statutory schemes insuring 90% of asset value in the very unlikely event of a life assurance companies failing. Nothing in this world is totally secure, but an offshore portfolio bond comes into the pretty-close category.

Other Advantages: Tax Advantages , Ease of Inheritance, Cost Savings, Choice of an Independent Financial Adviser.

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Tax-free growth

The payment of the premium by a UK resident or domiciled individual policyholder does not give rise to any UK tax consequences, and it is not reportable to Revenue and Customs (HMRC). Furthermore, all income and capital profits attributed to offshore portfolio bonds grow free of any income and capital gains taxes.

In contrast, income and capital profits of investments held within onshore life insurance policies issued by UK resident carriers are subject to taxation in the hands of the life insurance company, generally at the lower rate of tax (20%). Therefore, monies invested in offshore portfolio bonds work harder than those issued by UK resident insurance companies.

Here it is important to know that the antiavoidance rules, which deem the profits of persons resident outside the UK to be income and chargeable gains of persons resident in the UK, do not apply to such policies. The income and capital profits attributed to life insurance policies, whether issued by non-UK resident life insurance companies or UK resident life insurance companies, is not deemed to be the income and capital profits of the UK policyholder.

When UK tax will trigger? And only if you are UK resident

As long as the funds are held in the collective portfolio bond, no taxes are levied. However, on or following the occurrence of a “chargeable event” a charge to income tax will arise. The primary chargeable events are:

(1) the death of the insured person,
(2) the maturity of the life insurance policy (if it is a term policy, as opposed to a whole of life policy) or
(3) a complete surrender. Upon these events, the growth portion (value received minus original premium) of the benefits paid out is taxed as ordinary income.

Furthermore, partial withdrawals from the policy of up to 5% of the total premium are permitted. This provides the policyholder effectively with “tax-free income” for up to 20 years.

However, one needs to beware that any withdrawal above the 5% allowance is considered a chargeable event. Moreover, if the 5% allowance is exceeded in any one year, the entire withdrawal will be taxed, not just the growth portion. To address this situation and retain the highest possible level of tax-efficient liquidity, policy bundling can be considered.

Finally, life insurance policies may be assigned in whole or in part for no consideration without a chargeable event occurring; this is helpful in the context of inheritance tax planning.

Increased investment choice

Most offshore portfolio bonds offered to UK persons are tax efficient, but the policyholder is restricted to investments into so-called “prescribed property”.

By law, this means the investments must be in open-ended investment structures. Closed funds and other “private” investments are not allowed. Based on these requirements most insurance companies limit their customers’ investment choices to a pre-defined list of insurer-approved investment funds, typically unit trusts and OEICs.

Recently, a number of offshore life insurers have introduced more advanced solutions with more flexible investment options. These policies have a higher minimum, which generally starts at £100,000 to £150,000. They provide the policyholders with a choice of insurer-accredited investment managers.

Based on either, a financial advisory agreement or a discretionary investment strategy mandate, these top rated wealth managers then provide a more personalized service to affluent investors. These policies, while still tax compliant, allow for far more advanced and specialized asset classes and investments, thus hopefully providing more opportunities to secure better returns.

Further attractions:

1. Asset protection

Litigation is on the rise, not just in America. Therefore, protecting one’s assets from potential exposure to lawsuits, malpractice charges, nervous creditors or unhappy ex-spouses, is a key consideration of sound wealth management.

In general, a multi-jurisdictional structure will afford a higher level of asset protection than structures with assets held onshore. In addition, properly structured portfolio bonds, established in the right jurisdictions, are protected on the basis of the fundamental life insurance laws of those countries. The assets held in the policy are protected from creditors and plaintiffs. They cannot be seized or included in any bankruptcy proceedings.

Properly structured portfolio bonds protect your assets even if there is a judgment or court order against you.

2. Confidentiality and safety

Based on current UK rules, offshore portfolio bonds are not reportable to UK authorities. And, as long as the assets are held within the policies and no chargeable events (as discussed on previous page) are triggered, the offshore portfolio bond can be owned in full privacy and complete compliance with UK law.

Furthermore, the unique structure of a portfolio bond adds to its confidentiality and safety. Contrary to an offshore bank account or trust, the structure of a portfolio bond is such that the beneficial owner of the policy account is not the policyholder but the insurance company. Therefore, all transactions and investments are made in the name of the insurance company. The custodian bank does not know the identity of the policyholder. This has tremendous implications on confidentiality.

For instance, investors who opt for a portfolio bond, instead of an offshore bank account or trust, will never wake up to the kinds of issues encountered by more than 100,000 UK investors when the details of Barclays offshore bank accounts were handed over to HMRC.

This highlights another critical dimension of sound planning. Ideally, one should only work with institutions that are domiciled in jurisdictions with a long-term record of watertight confidentiality rules. Moreover, one should select jurisdictions that are not exposed and will not easily bend to the pressures and whims of one’s home country. In this context, one might prioritize jurisdictions such as Switzerland, Luxembourg or Liechtenstein over jurisdictions such as the Isle of Man or Jersey.

In Liechtenstein or Switzerland, the confidentiality of policyholders is protected strictly by law. Similar to the Swiss banking secrecy rules, insurance companies are prohibited from sharing information on their customers with any third parties. They communicate and correspond exclusively with the owners of the insurance policies, the policyholders.

3. Fast payout in the event of death

An offshore portfolio bond allows for assets to be inherited before probate is established. An offshore insurance policy will pay the cash value to designated beneficiaries without delay upon receipt of the death certificate.

Neither a will, certificate of inheritance nor power of attorney are required. The designated beneficiaries benefit from immediate access to the assets and are paid out according to the policyholder’s specifications in one lump sum, annual payment or even in kind.

4. Planning opportunities if you are going to live abroad…

As financial planners and wealth managers seek compliant offshore planning solutions and they recognize the unique benefits of offshore portfolio bonds, they are starting to replace the former champions of international tax and estate planning – trusts, foundations, international business companies (IBC’s) and the like. In most jurisdictions, including the UK, trusts and foundations cannot offer the legal benefits afforded by adequately structured life insurance policies.

In particular, where clients are exposed to the tax rules of more than one country, sophisticated planners have started to employ portfolio bonds. A few examples of situations where creative planning and the advantages obtained with offshore portfolio bonds will help the reader to better recognize the possibilities:

  • UK citizens frequently acquire property and retire abroad. One preferred destination is Spain. Often they are unpleasantly surprised by the very unfriendly Spanish inheritance tax rules. Depending on the value of the property inherited and the relationship to the heirs, the inheritance tax rate can be as high as 82%! What’s more, the Spanish authorities will not allow the heirs to sell or pledge the house before the tax is paid. Obviously, this may create a severe liquidity issue. A well structured equity release plan in conjunction with a portfolio bond can make a big difference.
  • Another prominent holiday/retirement jurisdiction for UK persons is South Africa. On the same token, a large South African contingency lives in the UK. In South Africa, portfolio bonds benefit from similar tax benefits as in the UK. By combining these tax advantages with the privacy and asset protection advantages discussed above, one can create excellent structures for UK persons with effective or potential residency status in South Africa, or for UK persons emigrating to South Africa.
  • US ex-pats, including US persons resident in the UK, are subject to the US tax regime no matter where they live. By cleverly employing an offshore portfolio bond to shield their international assets, they can benefit from tax deferral, and potentially, even from tax elimination altogether.
  • UK resident non-domiciles have many ways to avoid income tax in the UK. However, they cannot invest in UK quoted investment trusts or unit trusts without becoming subject to taxation. This, however, is not the case when such investments are made from the protective shield of an offshore portfolio bond.

An investment for “world citizens”

To conclude, what makes offshore portfolio bonds unique, in terms of their UK tax benefits, is the ability for UK policyholders to invest an unlimited sum in a flexible and discreet investment product that defers capital gains tax AND income tax while invested.

Furthermore, due to the fact that similar tax benefits exist in other countries, offshore portfolio bonds make for excellent planning tools in cross border situations, addressing the needs of mobile “world citizens”.

Offshore portfolio bonds offer great benefits. However, there are many issues to consider in choosing the correct type of life insurance policy, the life or lives to be insured, the jurisdiction of the insurance company and insurance company itself. A discussion of these issues is outside the scope of this article and will very much depend on the specific needs of each investor. Thus, a diligent personal consultation with a competent professional is recommended.