Many Brits are moving their money into overseas investments to avoid a tax grab by Rachel Reeves, it is claimed.
The move has been driven by a desire to avoid higher capital gains tax rates, as well as the slashing of allowances and frozen income tax thresholds, according to Quilter Cheviot and Waverton.
Savers who buy offshore bonds can grow their investments without immediate capital gains or income tax. At the same time they can withdraw up to 5 percent of the original investment annually tax-free, with unused portions carrying over.
Any gains are taxed as income and savers might be able to limit the figure payable to 20 percent rather than 40 or 45 percent if they delay realising these gains until they reach retirement. There are other tax advantages which make them attractive.
Marco Malagoni, of Waverton, said a harsher tax environment for investors – which reflects changes made by the last Conservative government as well as recent Budget moves by Rachel Reeves – means these schemes have become more attractive.
The move has been driven by a desire to avoid higher capital gains tax rates (Image: Getty)
He told the : “Offshore bonds give control of who pays tax and when. You can shelter funds while earning and paying the top rate (of income tax), then draw down quite efficiently in retirement.
“One of my clients is an NHS doctor earning £100,000, and his wife is also a higher-rate taxpayer. They have a £2m portfolio and they’re putting some of this in an offshore bond.
“These (strategies) have historically been the preserve of high-net-worth people, but there is now a higher need for tax deferral.”
Rachel Reeves raised capital gains tax rates from 10 percent to 18 percent for basic-rate taxpayers and from 20 percent to 24 percent for higher-rate taxpayers. She also brought private pensions within the scope of inheritance tax from April 2027.
Investors were already feeling the pinch after the previous government slashed the threshold at which capital gains are taxed from £12,300 to £6,000 from April 2023, and then to £3,000 from April this year.
At the same time, the annual figure people can save into an ISA has been frozen at £20,000 since 2017. This would have been a higher £56,550 if the cap had risen in line with inflation.
Separately, income tax thresholds have also been frozen since 2020-21 and will remain so until 2027-28. The freeze has already dragged thousands of taxpayers into higher brackets as inflation pushes up wages.
Ian Cook, of Quilter Cheviot, said he is advising an increasing number of clients to funnel cash into offshore bonds.
He said: “One client prior to the Budget was going to keep his pension and spend that last, spending his ISA and other cash assets first. Now the recommendation is to move a lot of the money in cash and ISAs into offshore bonds, and to spend his pension.”
Importantly, offshore bonds can be assigned to another person, meaning savers can take advantage of tax-free allowances.
Mr Cook said: “If you have a child over the age of 18 and they go to university or want to buy a first home, and there are taxable gains you want to take, you can draw the money from the offshore bond in their name.
“This means you can use their £12,570 personal allowance, plus £1,000 personal savings allowance, plus the £5,000 starting rate for savings – that’s £18,570 with no tax to pay. I have lots of clients doing this.”
Investments are able to compound more quickly as no taxes are deducted on the gains or income earned within the bond.
However, you may have to pay tax on an offshore bond if you withdraw more than the 5pc annual tax-deferred allowance, surrender the bond, or when a chargeable event occurs, such as the death of someone whose life was insured under the bond.