Offshore bonds and other foreign policies - further topics

By Tolley

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Offshore bonds and other foreign policies - further topics
  • Cluster policies
  • Personal Portfolio Bonds
  • Offshore bonds and the remittance basis
  • Offshore bonds and temporary non-residence
  • Older policies

The Offshore bonds and other foreign policies guidance note discusses what is meant by an offshore bond and a foreign policy. It explains the tax charges likely to arise, and how they should be reported on the Tax Return. You are thus advised to read that note first.

This guidance note covers several more specialised areas: cluster policies, personal portfolio bonds, the treatment of some older policies and the interaction between the foreign policy rules and the remittance basis and temporary non-residence rules.

Cluster policies

Some bonds are held, not as a single policy, but as a collection of small policies under a ‘cluster’ or ‘umbrella’. At the outset all policies are identical. They may also have the same number, apart from a sub-designation (for example, policies numbered XP234567/1–100, where numbers 1–100 identify the individual policies). The taxpayer may also only have one policy document for all the clustered contracts.

Although UK insurers also issue cluster policies, offshore bonds are frequently sold in this form.

A common reason for having cluster policies is so an individual can fine-tune his disposals to make best use of his tax bands, or other reliefs and exemptions. For instance, in a year when there was some headroom under the 40% threshold, he might cash in a small number of bonds and take the chargeable gain.

Risks and reversals

However, cluster policies need particular care. If the individual takes 5% per annum, it is important to check that he has taken 5% of each bond: sometimes the insurer simply cancels 5% of the total bonds, triggering maturity gains on all of them. This may be the result of incorrect or unclear instructions from the policyholder, or an administrative mistake by the insurer. The taxpayer may wish to check what instructions were given.

Similarly, where there has been a disposal

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