For companies using fair value accounting, onshore and offshore bonds are unlikely to be considered ‘basic financial instruments’ and as such they will need to be reported annually.
For companies using fair value accounting, onshore and offshore bonds are unlikely to be considered ‘basic financial instruments’ and as such they will need to be reported annually.
Mirco-entities (historic accountancy) – for micro-entities, investments are taxable on realisation i.e. full and part surrender/ disposal.
Small companies (fair value accountancy) – – investments which meet the description of a ‘basic financial instrument’ will be taxable on realisation i.e. full and part surrender/ disposal. Investments which do not meet this description will need to be reported annually.
For companies using fair value accounting, onshore and offshore bonds are unlikely to be considered ‘basic financial instruments’ and as such they will need to be reported annually.
Collective investments where the underlying investment is more than 60% invested in debtbased stock (cash deposit, fixed interest or Government stock for instance) will also need to be reported annually.
Collective investments with 40%+ investment in equities do not fall within the loan relationship rules. A tax liability only arises on realisation of the asset, although ‘income’ is taxable on an arising basis.
This can be summarised as follows:
| Collectives | Collectives | UK Life assurance | Offshore life or redemption | |
|---|---|---|---|---|
| Investment allocation | 60%+ invested in debt/fixed interest etc. | 40%+ invested in equities | No distinction between investment allocation | No distinction between investment allocation |
| Applicable tax rules | Loan relationship rules apply | Loan relationship rules do not apply | Loan relationship rules apply | Loan relationship rules apply |
| Tax due | Corporation Tax on increase year on year | Corporation Tax only levied on realisation of asset* | Corporation Tax on increase year on year | Corporation Tax on increase year on year |
| Tax credit available | Nil | Nil | Tax credit for life fund taxation available on final encashment. | No life fund taxation |
| Income from investment | ‘Income’ taxed on arising basis | ‘Income’ taxed on arising basis | ‘Income’ taxed within life fund. Will contribute towards any increase year on year. | ‘Income’ not taxed within the bond. Withholding taxes may apply. Will contribute towards any increase year on year. |
Collective investments. Distributions from collectives are paid gross. Corporation tax is payable on interest payments received. Dividends from equity funds are not taxable where they are considered ABGH distributions. These are dividend distributions made up of payments from underlying investments which meet the descriptions under paragraphs A, B, G, and H in section 1000 of the Corporation Tax Act 2010. If a collective fund provides a dividend payment from sources which do not meet this description, corporation tax may be payable. Ablestoke will inform the account holder of the total dividend paid for each fund. However, the account holder will be required to contact the fund manager for a detailed break down to determine whether they are ABGH distributions.
Onshore bonds - the UK based bond provider is liable to corporation tax on income and gains made on the underlying investments. On partial or full surrenders of the bond a credit is available to the policyholder for this tax paid when accounting for the gain.
Offshore bonds - benefit from having to pay no tax at source on the growth of the investment, other than some ‘withholding tax’. This is a tax on some dividend and interest income deducted in the country where the income was derived which cannot be reclaimed. This predominantly tax free growth is known as ‘gross roll-up’.
Switches on collective investments will be considered as ‘disposals’ so will need to be accounted for within the company accounts
Onshore and offshore bonds are structured differently as the bond provider owns the assets within the bond. The effect of this is that any fund switches will not trigger a gain or loss position for the company.
Income earned on a collective is taxable on an arising basis, therefore all income earned during the accounting period will need to be included within the company accounts. In addition, depending on the fund asset allocation (fixed interest or equity), gains will also need to be reported either year on year (fixed interest) or when realised (equity).
Income within a bond is not taxable on the company so does not need to be accounted for. Instead the bond value is accounted for year on year (fair value) or as a static value (historic cost). Disposals on either basis will need to be accounted for.
The size of the investment could impact on the availability of the two different tax exemptions/allowances available, namely capital gains tax entrepreneur’s relief and inheritance tax business property relief. Therefore, specialist tax advice should be obtained before investing in any product.
It is important to look at the company’s financial arrangements holistically to make sure the investment fits with the firm’s overall objectives and plans.
The value of investments and the income they produce can fall as well as rise, you may get back less than you invested.
Tax treatment varies according to individual circumstance and is subject to change.