How the increase in CGT makes offshore bonds more attractive

The rise in the rate of CGT should make offshore bonds even more attractive. The profit when you sell an offshore bond is taxed as an offshore income gain, and is subject to income tax. On disposals before 23 June 2010 we have an 18% rate of CGT, but income tax at 40% or 50%. As from 23 June 2010 the rate of CGT for a higher rate taxpayer will be 28%. Although this is less than the rate of income tax, when you take into account the other advantages of offshore bonds (see below) this can make them more attractive. The difference in the tax rates is a huge difference and is a disincentive to anyone looking to invest in the offshore bond market. Mutual funds for instance are taxed under the capital gains rules and therefore benefit from the 18% rate of CGT. An increase in the rate of CGT will therefore be beneficial for offshore bonds as investors start to return. Why offshore bonds are attractive investments It's not just the aligning of income tax and CGT rates that makes bonds attractive. Even under the previous regime with the flat 18% CGT rate, offshore investment bonds in particular (when containing income-producing assets) have been an attractive investment when compared to direct equity investment. This is because, with an offshore bond, any income from the underlying funds 'rolls up' until a chargeable event is triggered. Offshore bonds can also invest in a wide range of assets and have no tax deducted on their long term business fund, allowing investors to benefit from true gross roll up, as neither the fund nor product are taxed (other than irrecoverable withholding tax on certain funds) on an ongoing basis. The tax charge is then deferred until a chargeable event occurs. Personal allowance increases? In addition, the coalition papers clearly put the Liberal Democrat's policy of increasing the personal allowance for income tax purposes to £10,000 before any cut in inheritance tax. As from April 2011 the personal allowance will be increased by £1,000. This would also benefit sales of offshore bonds. This is because no tax charge is deducted from the life funds themselves and policies can be assigned to non-tax payers. A greater allowance corresponds with the ability of non-tax payers to crystallise a larger gain before being subject to tax. The small print will, as always, be vitally important.