Clients who are UK resident at the time of a chargeable event will be liable to income tax at their marginal rate, subject to any reduction due to top-slicing relief (if applicable).
Some clients may not pay UK tax at all, and these will include non resident clients and those who are able to absorb any gain in their income tax annual allowance, for example, non-working spouses.
However, what is often missed is that these people may have invested in a taxed fund inside their offshore portfolio bond, meaning their returns are not truly gross returns.
There are broadly three types of fund from a taxation perspective that can be held inside an offshore portfolio bond:
- Gross funds – where no tax is payable inside the fund, these can include cash and fixed interest funds.
- Funds where some tax is suffered at source which cannot be reclaimed, these can include equity based funds which cannot reclaim the 10% tax credits on any UK dividends they receive.
- The last category is funds which are taxed at source but where the fund is able, in principle, to pay gross, but for administrative reasons, chooses not to.
Advisers need to be clear in their discussions with the fund management groups about what their approach is in order to ensure their clients are properly informed in their investment decisions.
