This change is fantastic news for holders of offshore bonds who are currently UK resident, or are considering moving to the UK as new regulations (Statutory Instrument 2017 No. 1182) will permit additional property categories to be held within an Offshore Bond, without it being deemed a personal portfolio bond (PPB) for income tax purposes, making these potentially more attractive to investors.
This could widen the investments that they can select for their policy to invest into, without triggering the PPB rules.
The 2016 Budget has been up for review with the UK Government regarding life insurance and the categories of permitted investments, life annuity or capital redemption policy without it becoming taxable as a PPB.
Typically, when a life insurance policy matures or is surrendered, taxable gains from it will include capital redemption policies and contracts for life annuities.
An individual, until they take cash from the policy, is prevented by the PPB rules from placing their personal assets within a life insurance policy for the purposes of deferring tax charges on the income or gains.
Where a life insurance policy falls within the definition of a PPB, an annual tax charge is levied to deter such action. A life insurance policy or a capital redemption policy will be a PPB if the terms allow the policyholder to select some or all of the underlying assets ('property').
However, if all of the assets which may be selected fall within certain listed permitted property categories, the policy will not be a PPB.
The permitted assets on the current list are:
Extending the permitted asset categories has a practical effect to allow deferral of tax when held within a life policy wrapper.
Currently, non-permitted assets would have a 15% annual taxable gain of the premium, with an additional 15% of the previous PPB charges. No top-slicing relief is available either.
The new permitted investments
Despite the development of new investment products, the permitted asset categories have not changed in a material way since 1999.
With effect from 1 January 2018, there have been three categories added to the regulations including:
7(a) an interest in a collective investment scheme constituted by a company resident outside the UK other than an open-ended investment company; has also been removed from the new regulations as it is incapable of holding any property.
Real estate investment trusts
A real estate investment trust (REIT) is a limited company which invests mainly in property, its shares must be widely held.
Investors own shares in the UK REIT, and the company manages the underlying investments. The UK REIT is exempt from UK tax on the income and gains of its property rental business.
However, at least 90% is required to be distributed to the shareholders, with those shareholders being taxed as having received property income.
Therefore, there is a broadly similar return for the shareholders as if they had directly invested in the property.
Approved investment trusts overseas equivalent
Already included within permitted asset categories are investment trusts. Included within the permitted property categories, the regulations permit overseas equivalents of investment trusts.
Authorised contractual schemes
There is a type of investment fund that’s authorised and regulated by the Financial Conduct Authority (FCA), known as a Authorised Contractual Scheme (ACS), which can be constituted as a contractual co-ownership arrangement or limited partnership.
The ACS has an authorised manager responsible for investment decisions. Policyholders would not be permitted to select an investment in an ACS that held their 'personal property'.