In last month’s article, I focused on the need for individuals to save regularly in order to achieve their personal goals. If you are fortunate enough to have already accumulated savings over a period of time, the next step is to ask, ‘what can be done to ensure those life savings are working equally as hard as you are?’ An offshore savings bond seems to be the most popular option.
A bond can offer immense flexibility and freedom of choice through access to a wide range of investment asset types. This wide investment choice is known as ‘open architecture’. It enables you to diversify your bond into different sectors such as mutual funds, cash holdings, stocks and shares, fixed interest securities, structured notes plus many more great options. Similar to first-time investors, returns and benefits would depend on an individual’s ‘attitude to risk’ and time invested.
Such a vehicle can have great benefits, especially when it comes to taxation planning. The Channel Islands (the jurisdiction of most chosen bonds) is not currently liable to income tax on growth, capital gains tax or corporation tax on assets linked to the policy, so your investment can grow virtually tax free. In addition to being able to invest in cash, if you hold any stocks and shares you are quite within your right to transfer these shares into your portfolio. This means any dividends received on said shares would not be subject to capital gains tax. This tax-neutral environment means switching between funds and assets will also be tax-free.
Withdrawals can be made from a bond at any given time either on a regular basis or as a one-off option, subject to the terms of the provider. You can use your bond to provide a regular income to fund your retirement or children’s education.
Another reason there is a high demand for an offshore bond is for estate planning purposes. Upon death, depending on your country of residence, there is a possibility of an inheritance tax bill awaiting the beneficiary of your estate. By using a trust (offered by most providers) you potentially reduce the inheritance tax owed upon death.
What is a trust?
A trust is an arrangement that allows a third party (trustee) to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries.
Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death. Assets in a trust may also be able to pass outside of probate, saving time, court fees and potentially reducing estate taxes as well.
It is important when speaking with an advisor that your aim and objectives for a savings vehicle are incorporated into the plan. The planning should also take into consideration where the individual plans to reside upon leaving the UAE.