Summary
Timeline Planning supports the use of offshore bonds as a tax wrapper in client financial plans.
You can model both new and existing offshore bonds, with options for full or partial surrenders.
Partial surrender involves withdrawals across all segments, reducing their value, while segment surrender reduces the number of segments without altering their value.
The 5% annual tax-deferred allowance accumulates and can be used to withdraw funds tax-free.
If the surrender of the segments exceeds the allowance, the excess is treated as a chargeable gain and taxed.
Description
Timeline Planning integrates offshore bonds as a tax-efficient wrapper into your clients’ financial plans. The system’s flexibility allows for the setup of both new and existing offshore bonds. Depending on the inputs you provide, the model determines whether any surrender from the wrapper triggers a chargeable gain and identifies any applicable allowances to reduce this gain.
Inputs
When configuring an offshore bond in the financial plan, you can specify various parameters, including the premium paid, the bond’s current value, the number of years since the last surrender, and whether the surrender will be full or partial.
Partial and Segment Surrender
Timeline Planning currently supports two types of surrenders—partial and segment—but not a combination of both.
Partial Surrender: The number of segments in the bond remains unchanged after the withdrawal, with the withdrawal spread across all segments, reducing their individual values.
Segment Surrender: The withdrawal affects specific segments, reducing the total number of segments while the value of the remaining segments stays constant.
Step #1: Available Allowance
Each year, a portion of the original investment—typically 5%—can be withdrawn tax-deferred. This annual allowance accumulates over time and can be used to withdraw funds tax-free.
Important Note: Timeline does not currently support adviser charges that reduce the 5% tax-deferred allowance on modern bond structures.
To calculate the tax-free amount, the accumulated allowance is added up for each year the bond has been held since the last withdrawal. This cumulative amount represents the total tax-free withdrawal available.
Step #2: Chargeable Gain and Taxes
Partial Surrender: The 5% annual allowance accumulates and can be used during a surrender. If the withdrawal exceeds the accumulated allowance, the excess is considered a chargeable gain and taxed. If the gain pushes the total taxable income into a higher tax bracket, top-slice relief may be applied to reduce the overall tax burden.
Full Surrender: The chargeable gain is calculated based on the number of segments sold and their growth value (profit). The value of the segments at the time of withdrawal determines the number of segments to be sold. In this scenario, the 5% allowance is not applicable.
Regardless of the type of surrender, Timeline’s engine taxes the chargeable gain by considering the entire financial plan. This includes income sources such as state pensions, annuities, and rental income, as well as any taxable income from pensions and personal allowances. By default, the chargeable gain is taxed after accounting for other taxable income but before General Investment Account (GIA) withdrawals unless the withdrawal order is customized.
Example - Partial Surrender
Original Investment: £400,000
Number of Segments: 100
Original Segment Value: £2,000
Years Without Withdrawal: 5
Annual Allowance: 5% of the original investment
Withdrawal Amount: £200,000
Calculation:
Annual Allowance: £200,000 * 5% = £10,000
Cumulative Allowance (5 years): £10,000 * (5+1) = £60,000
Excess Withdrawal: £200,000 - £60,000 = £140,000 (Chargeable Gain)
Assuming the client’s total taxable income is £50,000, the tax due on the chargeable gain will be calculated based on this amount.
Example - Segment Surrender
Original Investment: £200,000
Original Segment Value: £2,000
Current Value: £400,000
Withdrawal Amount: £200,000
Years Without Withdrawal: 5
Calculation:
Total Segments: £200,000 / £2,000 = 100 segments
Current Value per Segment: £400,000 / £200,000 * £2,000 = £4,000
Segments Withdrawn: £200,000 / £4,000 = 50 segments
Chargeable Gain: £2,000 * 50 = £100,000
With a taxable income of £50,000, the tax on the chargeable gain is calculated accordingly.
Net to Gross
The examples above use gross planned spending for simplicity. However, Timeline’s engine can also support net planned spending. The system will calculate the gross equivalent of the net value needed by considering all other taxable income from various sources.
Conclusion
Timeline Planning provides robust tools for managing offshore bonds, offering flexibility in handling both partial and full surrenders. By accurately calculating allowances and chargeable gains, the platform ensures efficient tax management and strategic financial planning.