The UK Emergency Budget in June 2010 reiterated the coalition government's intention to reduce corporation tax. Since 2010 CorporationTax has reduced from 28% to 26% (2011/2012) and 24% (2012/2013). The Chancellor has promised that further reductions will be made each tax year until 2014/2015 when the rate is likely to be 23%. For small companies the rate of Corporation Tax is 20% (2012/2013).
Companies pay Corporation Tax on any taxable profits. As the loan relationship rules now apply to corporate owned life assurance and redemption bonds, the company accounting practice will determine how an offshore bond will be taxed. There are two different forms of accounting practice:
- Fair value basis, which means that the value of the life assurance or redemption bond will be assessed year-on-year.
- Historic cost basis, which means that the life assurance or redemption bond will not be assessed year-on-year but will generally be taxed on realisation of part or all of the investment (i.e. withdrawal, encashment, disposal).
The year-on-year reduction in Corporation Tax provides another reason why an offshore bond may be an appropriate investment for a company.
PlumbersRUs are a well established distributor of plumbing accessories and plumbing services. Their profit is well in excess of £1.5 million a year. They have just won a tender from a national company which will generate an additional £500,000 profit for the company in its accounting year ending 31 March 2012. The directors receive financial advice recommending they invest £500,000 into an offshore bond.
Within the offshore bond the directors can buy and sell different assets without creating any immediate tax liability. The offshore bond also allows different funds to be held within one product which provides consolidated reporting without individual paperwork, dividend receipts and tax returns usually associated with holding a portfolio of investments, saving accountants costs, time and effort. The directors also have the option to use a third party investment specialist to guide them and manage an appropriate risk adjusted portfolio.
As PlumbersRUs account using a historic cost basis then an offshore bond provides the compounding effect of gross roll-up as any dividends received within the bond wrapper will be taxed as part of the overall bond growth. PlumbersRUs can defer tax on any gains which is likely to save tax as rates reduce.
For example, if the offshore bond has made say a £35,000 gain and we assume this increases by 7% each year then depending upon when this is encashed the amount of tax payable can be reduced depending in which year it is encashed.
|
Accounting Year |
Cumulative gain year on year |
Tax rate |
Tax due if no encashments |
Tax due if investment fully encashed |
|
1/4/2011 – 31/3/2012 |
£35,000 |
26% |
zero |
£9,100 |
|
1/4/2012 - 31/3/2013 |
£72,450 |
24% |
zero |
£17,388 |
|
1/4/2013 – 31/3/2014 |
£112,521 |
23% |
zero |
£25,880 |
|
1/4/2014 – 31/3/2015 |
£155,397 |
23% |
zero |
£34,187 |
If no disposals are made then no Corporation Tax would be levied year on year. The gain on the bond can also be encashed at a time to suit the company. For example, PlumbersRUs could encash the bond during an accounting period when it has trading losses (or for example where they have made pension payments to employees which has led to an overall loss), so that the gain from the bond can be offset against these losses and reduce their overall Corporation Tax liability.
Had PlumbersRUs used a fair value basis then any increase in the value of the offshore bond over an accounting period will be taxed as a non-trading credit.
|
Accounting Year |
Gain during each year |
Tax
rate |
Tax due |
Cumulative tax paid |
|
1/4/2011 – 31/3/2012 |
£35,000 |
26% |
£9,100 |
£9,100 |
|
1/4/2012 – 31/3/2013 |
£37,450 |
24% |
£8,988 |
£18,088 |
|
1/4/2013 – 31/3/2014 |
£40,071 |
23% |
£9,216 |
£27,304 |
|
1/4/2014 – 31/3/2014 |
£42,876 |
23% |
£9,433 |
£36,737 |
So where in the historic value basis the value stated in the accounts would be the same as that shown at the start of the accounting period, under the fair value basis the increase value of the offshore bond is shown at the end of the accounting period and therefore Corporation Tax would be payable on the increase in the value of the bond each year.
HM Revenue and Customs has confirmed that if a company is accounting using the Financial Reporting Standard for Smaller Entities (FRSSE) basis of reporting, it can use the historic cost basis and thus there will be no requirement to account for changes in the bond on a year-on-year basis.
How an offshore bond may help a corporate investor
- Companies will have access to investments or cash that they might not otherwise be able to buy. For example, certain deposits, bank accounts and structured products.
- Companies can save time, cost and effort by amalgamating investments.
- Companies can buy and sell assets easily without creating an immediate tax liability.
- Companies can use a third party investment specialist to guide them and manage an appropriate risk adjusted portfolio.
Additional points to consider
- By investing into an offshore bond, companies lose the benefit of the fact that dividends from collectives are tax free and also lose relief for indexation.
- The size of the investment may impact on the availability of capital gains tax entrepreneur's relief and inheritance tax business property relief. Therefore, specialist tax advice should be obtained before investing into an offshore bond.
The information provided in this article is not intended to offer advice.
It is based on Skandia's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Skandia cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.