Offshore Investment Bonds

Following the recent budget which saw the annual individual’s Capital Gains Tax (CGT) allowance reduced to £6,000 for the current (2023-24) tax year and to £3,000 from April 2024, Offshore Investment Bonds are looking increasingly interesting for UK Resident investors.

Offshore Investment bonds are tax efficient structures for managing investments, sometimes referred to as offshore bond investment wrappers or offshore portfolio bonds, which have features such as “tax deferral”, “gross roll-up”, and “top-slicing relief”. They can also be of benefit to those who want to focus on inheritance tax planning.

In this article, we are going to take a brief look at offshore investment bonds so that you can identify whether they might be a helpful solution for you. We will then run through some advantages and disadvantages.

What is an Offshore Investment Bond?

There are a variety Offshore bonds suitable for diverse types of clients, but what many of the bonds have in common is that they aim to produce medium to long term capital growth and are ideally held for a minimum of five years. They can also allow you to withdraw up to 5% per annum, tax free, as an alternative form of income (further detail below).

An offshore investment bond is usually classed as a life insurance policy because a portion of your policy can be paid out on death. However, in practice, they are an investment vehicle, based in an offshore jurisdiction.

The most popular jurisdictions for offshore bonds are Ireland, the Channel Islands, and the Isle of Man.

The primary difference between an offshore and onshore bond is that, with an onshore bond, tax is payable on gains and investment income received from the underlying investments within the bond. In an offshore bond, no income or capital gains tax is payable on the underlying investments. This means, in theory, an offshore bond would expect to grow faster than an onshore equivalent.

Offshore bonds are taxed under the chargeable event legislation, which means gains are assessed to income tax, rather than CGT.

How are Offshore Investment Bonds taxed?

One of the useful features of an Offshore Investment Bond is that you can withdraw up to 5% per annum (cumulatively) each year without a tax charge as an alternative form of income whilst the rest of the portfolio grows tax free.

A chargeable event occurs, for example, when you; make a withdrawal in excess of your allowable 5% return of capital, you cash in your bond in full, or the last life assured dies, triggering an income tax charge.

For UK based individuals any chargeable event gains will be subject to income tax at their appropriate rate at the time of withdrawal, so for someone considering retirement this could be a useful way of timing encashment, or partial encashment, when income is taxed at a lower band. Current income tax bands stand at: 20% basic rate, 40% higher rate or 45% additional rate. Taxpayers can use their personal allowance, starter rate for savings, and the tax bands mentioned above when calculating overall tax liability. For discretionary trusts, basic rate applies on gains up to £1,000, where this has not
already been set against other non-savings income, otherwise the rate applicable to trusts applies (45%).

When a ‘chargeable event’ does occur, the whole gain will be taxed in that tax year. As a result, more of the gain could be taxed at higher rates than if it had been taxed on an annual basis. ‘Top slice relief’ attempts to correct this by providing a deduction from the amount of tax due based on how long you have held the bond. It is a complicated calculation, and you should always seek advice and assistance with this.

Why Consider an Offshore Investment Bond?

There are a number of reasons why offshore investment bonds can be a useful option when it comes to your investment strategy.

• They are a tax efficient way to invest and save and you can leave your money to grow and not be eroded by tax.
• You can make 5% withdrawals of the original capital every year without suffering a tax charge over a 20-year period. This is a cumulative allowance which means if you do not access your annual 5% it will build up so you could draw 10% in the second year, if you did not take any in the first year, 15% in the third year if you had not used it in prior years, and so on.
• They are classed as an assignable asset which means they can be transferred as a gift to someone else over the age of eighteen without incurring CGT or they can be gifted to a trust.
• Unlike Pensions and ISA’s there is no limit to how much you can invest per annum.
• The whole bond can be assigned into trusts as part of a plan to potentially reduce your inheritance tax bill.
• Your Raymond James Wealth Manager can manage a portfolio of collective assets on a discretionary basis. There are also complex tax rules if you have spent time as a resident offshore and if this applies to you please seek professional advice.

Key considerations why not to consider an Offshore Bond

• You may want to withdraw your entire investment as any withdrawals not classed as a return of capital will be chargeable at your marginal rate of income tax.
• Higher minimum investment size. Typically, £50,000.
• Charges are higher than a typical Personal Pension or ISA.
• You have not used up your ISA allowance.
• Potentially complex rules when looking at making use of top-slicing relief.


Please note, that the detail provided above is for information purposes and does not constitute advice. No action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

With investing, your capital is at risk.


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