When offshore bonds?

1. When offshore bonds? Richard Leeson Head of UK Business Development, Prudential International

2. When? • Not if or why • Case for offshore bonds is stronger than ever • traditional advantages still apply • new opportunities post-Finance Act 2009 • Suitable for a range of client profiles

3. Income investors: 5% withdrawals Long-term withdrawals: retirement, DGT/ Loan Trust • Gross roll-up: better able to sustain long-term withdrawals • Break-even growth rates at 1% AMC*: • 6.061% offshore • 7.347% onshore Assumptions: Initial investment £200,000 Withdrawals p.a. 5% of initial investment Gross growth rate p.a. 6% Annual management charge p.a. 1% Onshore life fund taxation p.a. 17.5% *For 5% annual withdrawals http://www.pruadviser.co.uk/content/pruinternational/consider/longterm/

4. Non-taxpayers: assignment Non-taxpaying spouses/partners: • Can withdraw tax-free within personal allowance • Can take 5% withdrawals + personal allowance, then reinvest personal allowance • withdrawals create chargeable gains – but no tax • enables increasing withdrawals over time, as reinvestment increases 5% allowance • creating chargeable gain each year reduces the eventual gain on cashing in Assumptions: Initial investment £200,000 Growth rate p.a. net of AMC 6% Tax allowance growth rate p.a. 3% Age at outset 55 Cashed in at start of year 6 No product charges included • Total net withdrawals £53,336 • Cash-in value £207,735 • Chargeable gain at cash-in: £26,694 http://www.pruadviser.co.uk/content/pruinternational/consider/nontax_payer/

5. Non-taxpayers: early retirement • Can cash in tax-free where gain is within personal allowance • Client invests £200,000 at age 55 • Takes early retirement at 60 • Bond now worth £267,645 (end of year 5, before any withdrawals) • Cashes in 2 segments a year, using personal allowance to offset tax on gain • Total withdrawals over 5 years = £150,874 • Total tax paid = £2,541 • Year 10: client reaches 65 and takes pension Assumptions: Initial investment £200,000 Growth rate p.a. net of AMC 6% Number of segments 20 Tax allowance growth rate p.a. 3% Full personal tax allowance available No product charges included http://www.pruadviser.co.uk/content/pruinternational/consider/early_retirees/

6. Non-taxpayers: moving abroad • Onshore bond suffers tax at source – cannot be reclaimed/offset against local tax • UK collective liable to CGT if away for less than 5 tax years • If away for one full tax year, can cash in offshore bond with no UK tax* • If returning to UK, time apportionment relief Could be: • Clients with property abroad – moving at retirement • High earners – escaping 50% tax rate *There could be local tax in the country of residence. http://www.pruadviser.co.uk/content/pruinternational/consider/abroad/

7. Trusts Higher tax rates on accumulated income from April 2010 • 50% on interest, 42.5% on dividends • Annual tax returns  accounting costs • No income if invested in bonds – so no tax and no tax returns • but can still take 5% withdrawals if required

8. Loss of personal allowance http://www.pruadviser.co.uk/content/pruinternational/consider/higher_earners/ Applies where income is over £100,000 • £1 allowance lost per £2 income above the limit – until whole allowance is lost • 60% marginal tax rate: • taxed on £2 income + £1 lost allowance • tax on £3 at 40% = £1.20 • £1.20 tax on £2 income = 60% marginal tax rate • Only applies to earned income/investment income taxed as earned income • 5% withdrawals from a bond don’t count

9. Loss of personal allowance • Example: £100,000 earned income + £100,000 invested in UK corporate bond UT • 5% annual interest  £5,000 income over the limit • £2,500 personal allowance lost • effective tax paid on £5,000 = 60% = £3,000 • Switch £100,000 into offshore bond, in UK corporate bond fund • no immediate income tax • no loss of personal allowance • no tax within fund http://www.pruadviser.co.uk/content/pruinternational/consider/higher_earners/

10. High earners: pension tax relief Restriction of relief for high earners: • Relief tapered away from £150,000, to 20% over £180,000 • “Anti-forestalling” measures in 2009/10 and 2010/11 http://www.pruadviser.co.uk/content/pruinternational/consider/high_earners/

11. High earners: pension tax relief • £1,000 gross contribution will cost £800 net instead of £600 net • Combined with 50% tax rate, equivalent to £1,600 pre-tax income, compared with £1,000 at present • Offshore bonds as a complement/alternative to pensions: • loss of up-front tax relief will be less significant • for clients retiring abroad, could be outweighed by having no UK tax on proceeds http://www.pruadviser.co.uk/content/pruinternational/consider/high_earners/

12. Non-doms Post-2008 tax change • Client transfers offshore funds into an offshore bond • Taxed on the arising basis: • avoids £30,000 remittance charge • retains personal tax allowances • No tax within bond except withholding tax • Fully portable if client later moves abroad • If client stays in the UK, can put bond into Excluded Property Trust: • protects assets from UK inheritance tax • allows full access at any time http://www.pruadviser.co.uk/content/pruinternational/consider/non_doms/

13. Technical help http://www.pruadviser.co.uk/content/pruinternational/consider/

14. Technical help

15. Important notes 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. All references to tax are UK tax only. Non-UK residents may be subject to tax in their country of residence. Prudential International cannot and does not give tax or legal advice and cannot accept liability for any loss suffered by any person as a result of action taken or refrained from on the basis of the material in this presentation. The registered office of Prudential International is in Ireland at Montague House, Adelaide Road, Dublin 2. www.pruadviser.co.uk/international