New tax rules may impact UK clients investing in Offshore Investment Bonds

On the 6th April this year new capital gains tax (CGT) legislation was introduced; it’s aim is to tax non-UK residents investing in UK property. The new tax rules have proven to be highly complex (no surprise there!) and there has been little guidance and clarity from HMRC, meaning that It is only now that the implications are being fully understood. What we have discovered is the new legislation will also impact offshore bonds that invest in UK property rich funds, even those held by UK residents.

The legislation brings all disposals of UK property by non-UK residents within scope for capital gains tax. Investments in UK property includes direct property and indirect investment through property funds – for example unit trusts or Open Ended Investment Companies (OEICs). It is only UK property rich funds that are impacted. HMRC defines UK property rich funds as those having over 75% of their gross asset value invested in UK property. UK residents with offshore bonds are impacted as the offshore bond provider is the legal and beneficial owner of the investments held within the bond, and therefore funds will be deemed to be held by a non-UK resident even if the policyholder is a UK resident.

HMRC Discuss The Impact with Offshore Bond Providers

Offshore bond providers have been liaising with HMRC and fund managers so that they understand which funds fall within the scope of the legislation and are only now starting to communicate their findings. If you hold UK property rich funds through an offshore bond, then there may be CGT to pay when a fund is sold. Any gain on that fund since it was purchased (or since 6 April 2019 if purchased before this date) will be subject to tax. The offshore bond provider is liable for any tax due in the form of corporation tax at the current rate of 19% (this will reduce to 17% from 1 April 2020), and will pay any amount due to HMRC.

The expectation is that offshore bond providers will pass this tax on to the policyholders as a policy charge in accordance with their policy terms. Unfortunately, policyholders cannot offset this policy charge against any tax they may owe when calculating the gain on their policy. This will essentially result in double taxation, leading to an unfavourable tax position for clients.

Some offshore bond providers are applying the new policy charge immediately, whilst others have said that they will start to apply any tax charge from beginning of the next tax year. Providers are also likely to apply restrictions or remove access to affected funds moving forwards.

If you are an offshore bond policyholder you need to consider whether your investments or portfolios are affected and if so, what impact the additional policy charge will have on the overall return of the fund? How important is the property fund to your portfolio? Are there alternatives that can maintain your portfolios diversification, asset allocation and risk level considerations? Are there costs in switching to alternative fund solutions?

If you are affected by this new tax legislation or have any concerns about your financial plans and investments, please contact me for a free, no obligation initial discussion.

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