Warr & Co Chartered Accountants - Article - Changes To Corporate Owned Investment Bonds

Taxation changes that were announced in the Pre-Budget statement in October 2007 have since been ratified in the March 2008 Budget.

A key advantage of offshore bonds has been the ability to defer tax on gains until full surrender or partial withdrawals above 5% p.a. on a cumulative basis. This is being removed and this will apply to companies with accounting periods commencing from 1st April 2008, or later. Until the accounting period starts, the existing pre-April 2008 rules will apply. For example, a company with a year-end of 30th June, will have the new regulations applying from 1st July 2008.

So what are these rules?

Investments affected, such as offshore bonds, will have to be valued at the start and end of the financial year, with any gain or loss over the period being bought into the accounts and taxed accordingly. The result is that there ceases to be a tax shelter from using such an investment wrapper.

The following examples relate to a UK Company holding an offshore investment bond

Example 1

Company year end 31st March 2008

Original Investment	£50,000
Surrender value @ 31st March 2008	£65,000 (gains of £15,000 up to this date continue to benefit from gross roll up and tax deferral)
Surrender value @ 31st March 2009	£70,000
Gain assessable within 2008/09 financial accounts	£5,000

Example 2

Company year end 31st December 2008

Original Investment	£25,000
Surrender value @ 31st December 2008	£30,000 (gains of £5,000 up to this date continue to benefit from gross roll up and tax deferral)
Surrender value @ 31st December 2009	£32,500
Gain assessable within 2009 financial accounts	£2,500

Example 3

Company year end 30th June 2008

Original Investment	£100,000
Surrender value @ 30th June 2008	£80,000 (loss of £20,000)
Surrender value @ 30th June 2009	£100,000 (i.e. to original premium)
Gain assessable within 2008/09 financial accounts	Nil (gains under new rules not brought into account until value exceeds original premium )

As a result of the change in legislation companies may wish to review their investment bonds and may prefer to invest in unit trusts, or similar products, where investment gains are only taxed on realisation and dividends from UK equities suffer no further tax liability.

Date of Article: 18th March 2008

Updated: 10th April 2008

Tim Warr - Warr on...