Offshore Portfolio Bonds for Canadians living in the UK

The word ‘bond’ is a misnomer in that it is not a ‘bond’ in the traditional sense of being a security that is issued by a government or company in order to borrow money.

Instead, an Offshore Portfolio Bond (OPB) is an investment ‘wrapper’ provided by an insurance company. Within the ‘wrapper’ the investor can buy investment funds. In many ways, it is like a second pension or another ISA: it is simply a tax-advantaged structure in which one can make investments.

There are typically both initial and upfront fees that an investor must pay for an OPB such that it often does not make sense unless the amount invested within the OPB is at least £100,000 (though there are instances in which it could make sense for a smaller amount).

What are the tax advantages in the UK?

Just like an ISA, any income and investment gains within the OPB are free of any UK tax. This is a huge advantage relative to a regular, taxable investment account.

Unlike an ISA but similar to a pension, you must pay income tax on withdrawals from the OPB. However, you may withdraw 5% of the initial amount each year for up to 20 years without incurring any tax (think of this like withdrawing your initial investment tax-free over 20 years). You do not have to withdraw the 5% each year; you could, for example, withdraw 100% of the initial amount after 20 years without incurring any tax if you had made no previous withdrawals.

The OPB can pay out its income and gains to anyone. This flexibility is potentially very attractive from a tax perspective. For example, the gains could be paid to a child who, in turn, would pay their own school fees. As the child’s income tax rate is presumably lower than the adult who controls the OPB, the tax burden could be reduced from as much as 45% to zero. In this example, the OPB both ‘rolls up’ income and gains tax-free and pays out its profit tax-free. The same logic can be applied to any ‘beneficiaries’ that have a lower tax rate than the initial investor.

What are the tax advantages upon moving to Canada?

OPBs can be particularly useful for people living in Britain who may move abroad in the future, including Canadians moving home. When moving to Canada, the ‘book value’ of your investments, for Canadian tax purposes, are set to the day you arrive in Canada. Therefore, it is possible to set up an OPB that accumulates income and gains tax-free while you are living in Britain and then collapse the OPB upon arriving in Canada without incurring any tax. You would then be free to use the assets formerly within the OPB for other purposes (e.g. buying a property in Canada).

Inheritance Tax planning within Offshore Portfolio Bonds

Unlike Canada, the UK has inheritance tax. It is levied at 40% on the value of UK estates above a certain level (usually £500,000 for an individual or £1 million for a couple; although it can be lower if a residential property is not included in the estate).

By combining certain trusts with Offshore Portfolio Bonds it is possible to mitigate your potential inheritance tax liability. One such trust is an Excluded Property Trust, which allows people who are losing their ‘non-dom’ status to protect their overseas assets from UK inheritance tax. There are also trusts for UK tax residents that allow you to continue to receive income from your assets but for those assets to be free from inheritance tax. It is often advisable to set up Offshore Portfolio Bonds within these trusts in order to reduce the trust’s tax burden - while still protecting the assets from inheritance tax.