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Comment: How to de-clutter your portfolio structures

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Ted Wilson, Associate Partner with the UK-based wealth manager St. James’s Place, examines the role of investment bonds as a portfolio diversification and tax structuring tool for investors.

Wealthier and more sophisticated investors in the UK, particularly those working in financial services, tend to have strong views on where they want to put their money. They are also likely to favour complex pooled investments like hedge funds, and many may be resident in the UK but domiciled elsewhere for tax purposes. It is therefore surprising that many of these players do not take advantage of the highly-evolved structures that are now available to hold their investments. 

One of the solutions available to de-clutter the lives of sophisticated investors involves the use of specialised offshore insurance vehicles known as investment bonds (bonds). These can cater for diverse investment requirements, while offering the efficiency of centralised investment administration and providing significant tax advantages to both domiciled and non-domiciled individuals.

Ideally, the bonds should be able to hold investments in all major international currencies, providing flexibility and convenience for investors. The range of permitted investments includes OEICS, UCITS, Investment Trusts, Unit Trusts, SICAVs, SICAFs and umbrella funds. However, the bonds are not permitted to invest in individual securities, property or derivatives.

The way the bonds work is to act as an umbrella, allowing the investors or their advisers to construct a portfolio of investments while sheltering taxable investments from immediate exposure by deferring tax on income. Indeed, there may not even be a requirement to declare the investment on a tax return. Consequently, the bonds may be able to preclude the need to bring the income and gains from an investment portfolio into the tax net of a jurisdiction where an investor has become resident.

This could be of particular interest to UK-resident non-domiciled investors who are not paying the annual £30,000 fee for the remittance taxation basis and who are therefore subject to universal tax.

These offshore structures also enable non-UK domiciled investors who wish to invest in UK funds to keep the assets outside the scope of UK inheritance tax. Moreover, they provide this facility without the need to use an offshore trust company.

The bonds can provide other significant estate-planning advantages too. Since it is possible to write the insurance policies in trust, the investment can pass quickly to beneficiaries on the investor’s death, thereby avoiding the need for probate and providing the opportunity for inheritance tax savings.

Investors should look for a bond issued by an insurer that is listed on an exchange such as Dublin in order to benefit from double taxation agreements to reclaim a proportion of some withholding taxes.

Last but not least are the administrative advantages. Investors should choose an insurer that will take over the administration of the portfolio held in the bond, thereby dispensing with the paperwork involved as a result of sales, purchases, dividends and other actions. They should also insist on at least quarterly valuations, with additional valuations available upon request.

In light of the benefits offered by offshore investment bonds, one cannot help but ask the question: shouldn’t the ‘cleverness’ of sophisticated investments be matched by the way in which they are held? 



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