Offshore bond withdrawal strategy

PippaO

Hello

I suppose I'm wanting a sense check here.

Client has an offshore bond, set up May 2012 with £10m with 1000 segments. She has taken a mix of monthly regular £10k pm & partial withdrawals across the plan over the years, totalling £4,58m all within the 5% allowance. Cumulative 5% remaining £1.34m, so massive future chargeable gain built up.

She needs an income to support her £120k pa lifestyle (+ larger ad hoc w/d for discretionary needs c£100k-£250k pa).
Her other income is c£35k from property rental & savings interest, so PA, PSA, SRB all used up but capacity to make pension contributions limited to £3600 pa.

1) She can continue with the £10k pm regulars with no immediate liability to income tax, but with v large potential chargeable gain on future surrender or death.
2) She could surrender individual segments each year (there are 983 remaining) for larger withdrawals (e.g. c£100k - £200k) but these would generate a gain with an immediate liability to tax, whilst reducing the cumulative 5% allowance.

Does this sound a sensible strategy - paying relatively small amounts of tax each year via individual policy surrenders, but chipping away at the 5% allowance & overall gains building up? Anyone think of a better way to structure it?

Thanks.

benjaminfabi

You don't say how old she is. Mortality may play a role, although it doesn't seem like she will ever run out of money.

Sounds like she needs c£90k pa from the bond. The 5% allowance on 500 segments is more than double what she needs, so I'd probably suggest segment surrenders.

But I'd ask what her attitude to tax is? She's paying it during her life or when she dies. 5% withdrawals is sustainable and = no tax in her lifetime. Segment surrenders probably means lower tax overall but more involved.

PippaO

Thanks Ben, agree a lot hinges on the client's view of tax. Unlikely to surrender the bond during her lifetime& will meet her spending needs. So choice between deferring tax or (possibly) reducing potential burden on beneficiaries. She is 57, good health, divorced with 2 adult non-dependent sons.

benjaminfabi

If she is only 57 you can also start to use PET via assignment as a strategy for reducing the estate. The segments are decent sizes for gifts

amarshall

Hi PippaO
We have a similar situation with two offshore bonds with £3m+ of gain built up but each only has 1 segment (don't get me started on that!).
The choice we gave the client was that they could take taxable withdrawals now (i.e. excess over 5%) and pay income tax on it and potentially avoid IHT on death by doing something else with the capital released. The alternative is to leave it in the bond, and accept that both income tax and IHT will apply on second death.
They are in their 80s and are the only lives assured on the bond.
Given that your client is younger and has segments available, I'd be at least looking to create gains taking her up to £100k to get money out at 40%. Assignments to trusts or individuals would help too. Is she the only life assured?
With big policies like this it can feel a little like playing around the edges, but at least with your client, you have time on your side