Offshore Investment Bonds

Learn more about these investment wrappers


    What is the purpose of an offshore investment bond?

    An offshore investment bond is an investment wrapper set up by a life insurance company and domiciled in a jurisdiction with a favourable tax regime, such as the Isle of Man, Luxembourg, or Guernsey. 

    Increasingly, international clients are also opting to use Dublin to benefit from perceived increased regulatory protection and tax efficiency.  

    Internationally, offshore bonds are typically provided by global life insurance companies such as Friends Provident International, Old Mutual International, RL360, Generali Worldwide and Zurich International. 

    Offshore investment bonds can be used as an investment vehicle to control when you pay tax, how much you pay and whom you pay it to.

    Within an offshore investment bond, investments benefit from growth that is largely free of tax – often referred to as gross roll-up. 

    This can have a significant impact on returns, as we will show you below. 

    Unless the money from within the offshore bond - as either income or capital - is brought into the UK, it is not subject to UK taxes.   

    Investors must therefore be aware of the tax regime in which they are resident when they encash their bond.

     Choosing the provider and location of your offshore bond is therefore important, as this will dictate many of the rules surrounding taxation and access.  

    Many of the offshore bonds available are transparent, low cost, efficient tax planning structures - although great care must be taken considering such a tax wrapper.  

    The overseas use of offshore bonds has unfortunately become associated with high-charging, opaque, commission-based salespeople - who sell risky investments to the unsuspecting expatriate.

    Read more

    Investment bond key facts


    10 reasons to use an offshore bond

    One of the most common questions our financial planners are asked is "why use an offshore bond?"

    Here are 10 key features of an offshore investment bond:

    • Offshore bonds can be used as a tax efficient platform or wrap where you can manage your investments.

    • They can offer an offshore bank account together with your own chequebook, credit card and internet banking facilities.

    • Under certain circumstances they can make tax reporting more straightforward. Offshore bonds are not deemed to be ‘income producing assets’ - which negates the need for individuals or trustees to complete self-assessment tax returns.
    • Gross roll up – investments within the bond can be switched without the requirement for any tax reporting and without rise to CGT.

    • Income produced by investments within the bond is received gross, and will only suffer income tax on future encashment of the bond.

    • Time apportionment relief - income tax liability is reduced proportionally for time spent as non-UK resident. For example, if you have been resident outside of the UK for half the term your bond has been held, the taxable gain would correspondingly be reduced by half.

    • The bond can be assigned by way of gift without giving rise to an income tax charge, although there might be inheritance tax (IHT) considerations.

    • 5% of the original premium can be withdrawn from the bond for 20 years cumulatively without being subject to tax, being treated as a return of capital.

    • Bonds can be partially of wholly assigned (to another family member or individual), unlike ISAs or pensions.

    • Bonds can be placed in trust - and taken out of a trust - without rise to an income tax charge or CGT.

    Read more

    Gross roll up

    Gross roll up, or its absence, can have a significant impact on your investments returns.

    For example:

    Assume you invest £1, and that initial £1 doubles in value every year for twenty years.

    Twenty years later, you may be surprised to see that your £1 investment would be worth £1,048,576.

    If however, that same investment was hit with a 20% tax charge each year, equivalent to UK basic rate tax, it would be worth only £127,482. 

    If a 40% tax were applied, it would be worth just £12,089.

    You can see that the impact of tax is astonishing, and that careful tax planning via vehicles such as an offshore bond - where suitable and appropriate - is important.

    Choosing a bond

    As with any tax wrapper, it is critical to choose the underlying investments with extreme care.

    The underlying investments within the bond will most likely play a far more crucial role in either meeting or failing to match your expectations than any other single factor.

    An offshore bonds can offer a broader range of investment choice than its onshore counterpart:

    Investment Type  Onshore bond   Offshore Bond 
    Life funds Y Y
    Collective funds Y Y
    Bank deposits N Y
    Structured products N Y*
     Discretionary Management Service  N* Y

    *Applicable in certain circumstances

    It should be kept in mind that this greater flexibility may result in higher charges.  The provider will levy dealing charges to buy and sell different investments in the bond; there will also be custodian charges and provider-specific charges.  

    There needs to be a sound case for greater investment flexibility that justifies paying much higher fees.

    Read more

    Consumer protection – different jurisdictions

    Offshore bonds, as their name implies, are outside the UK for tax purposes.  This means that they do not come under the UK’s consumer protection rules.  

    It is important to understand the consumer protection offered by the jurisdiction where the offshore bond sits e.g. Isle of Man, Dublin, or Guernsey. 

    Only when you understand and are comfortable with that protection should you consider using a provider that favours one jurisdiction over another.

    Comparative tax treatment of onshore versus offshore bonds

      Onshore Offshore
      Investor Fund Investor Fund
    Tax on income  No further tax on a chargeable event above 5% unless higher or additional rate tax payers. 20% on all income 10% tax credit cover UK equities After 5% cumulative withdrawals highest marginal rate of tax to pay on a chargeable event 0% (possible withholding tax)
    Tax on Capital Gains Nil 20% tax less indexation relief Nil 0% (possible withholding tax)



    Frequently asked questions

    What are the costs associated with tax wrappers?

    Tax wrappers can be expensive if the benefits are not justifiable for the individual concerned.

    Investment bonds often are loaded with high establishment charges and high discontinuance penalties.

    Unscrupulous “advisers” (read brokers) may recommend underlying investments that pay them a trail commission, and therefore have high total expense ratios.

    This can significantly harm investment returns.

    The main charges to be mindful of are establishment charges, administration charges, dealing charges, fund manager charges, and exit charges.

    Be clear on each of these.

    What are the main tax planning opportunities

    Offshore bonds provide the investor with the ability to defer and plan taxation.

    As financial planners, we use these wrappers to assist clients with their (often) fairly complex tax planning needs.

    Being able to hold assets offshore and pay no tax on the capital increases or income distributions until a point in time specified by the client, to fit around other controllable sources of income, is a very valuable tool. 

    Many expatriates prefer to invest in offshore funds via offshore bonds rather than onshore unit trusts, because when profits are taken from the offshore investment bond, they are taxed as income at whatever tax rate applies to the investor in the country they are residing in.

    This can allow the investor to defer tax, to time the surrender of an offshore investment bond, and to control what tax they pay and when they pay it.

    Even more comprehensive information may be found in the Insurance Policyholder Taxation Manual (IPTM) - or contact us to discuss your queries.

    Why are offshore bonds so popular with expatriates?

    Offshore investment bonds offer potential tax advantages if you spend time residing outside the UK.

    This is because you can claim tax relief on gains made while you reside offshore. 

    This is called ‘time apportionment relief’ (see above) and you can reduce the tax paid by the proportion of time you were resident outside the UK.

    Conversely, time spent residing overseas reduces the number of years used when calculating “top slicing” relief.

    Jargon alert - what is top slicing?

    Top slicing can be applied where a chargeable gain (profit made on the crystallisation / sale of an offshore bond) pushes a basic rate taxpayer into the higher rate bracket. If, after adding the (profit) slice to a your other taxable income, you remain within the basic rate tier, then the whole gain would be subject to income tax at 20% (2017/2018 tax year).

    If you are already a higher rate taxpayer, then top slicing will have no effect, as the whole gain will be subject to higher rate tax.

    Below we have set out an example of how top slicing works:

    An individual has £30,000 of taxable income and has made a gain of £15,000 on their offshore bond, which they have held for three complete policy years.

    The top sliced gain equals £15,000 divided by 3, resulting in a £5,000 slice.

    Their total taxable income is £30,000, and the higher rate threshold for 2017/2018 is £33,500. Effectively, part of the slice is within the basic rate and part is within the higher rate. Top slicing allows tax to be applied proportionately at different rates on each slice.

    As a result £3,500 is within the basic rate of tax and £1,500 within the higher rate.

    £3,500 x 20% = £700

    £1,500 x 40% = £600

    The total tax on the slice is £1,300 (£700 + £600), which is effectively a tax rate of 26% ((£1,300/ £5,000) x 100).

    The bond has been in force for three policy years, so £1,300 is multiplied by 3 to arrive at the final tax payable on the gain of £3,900.

    Onshore bonds also benefit from top slicing where appropriate, however here the rules are slightly different and only available going back to the date of the last chargeable event, not back to the start of the bond.

    In the event of a full surrender, top-slicing for a non-UK resident uses all the years the offshore investment bond has been held but any full policy years the holder was a non-UK resident are not included in the top slicing calculation.

    However, we find many people hold offshore bonds not because of an underlying tax reason - but because, when used incorrectly, they provide an opportunity to a commission-based IFA to extract a large percentage of your savings (and transfer your wealth to them) through an opaque charging structure.

    Request your X-Ray Review™ today

    Because you deserve better results - nothing less