Please refer to the “Offshore bonds for UK residents” guide, for basic technical information of an offshore bond

Offshore bonds are a popular investment wrapper for UK residents, due to their flexible taxation benefits. These benefits can be extended to UK expatriates when they move abroad, depending on their commitments to the UK. It is mainly beneficial for those that have not been able to fully remove themselves from the UK tax regime, or plan to return to the UK in the future.

For UK residents gains on an offshore bond are subject to income tax. However, even if you are no longer deemed a UK tax resident you may still be caught by the HMRC’s statutory resident test which came into effect in 2013.

For those investors who may return to the UK the income tax would be reduced proportionately for time spent as a non-resident. Furthermore any top ups made are deemed to be made at the initial investment date even if made when a UK resident again. It should also be remembered that any gain, on full surrender, is divided by the number of years the policy has been in place – this reduced figure is then added to taxable income in the year of surrender and may, on very large taxable gains, avoid higher rate (40%) or additional rate (45%) for 2017/2018 UK income tax.

Advantages for UK expatriates

Investments within the bond grow virtually free of income tax and capital gains tax, although there may be tax to pay when the funds are taken.

The ability to manage the timing of when money is withdrawn is a further benefit as in most countries the gains are not taxed until realised. This capability to defer any tax liability and manage the timing can be particularly attractive but will depend upon individual circumstances.

Linked to that is the advantage of being able to buy and sell different assets without creating any immediate tax liability.

What’s more is the ease with which an investor can move between assets within an offshore bond. All deals are co-ordinated by the Life Office rather than having to approach different fund managers and there is also the benefit of one consistent dealing form. This can be a particularly attractive way to access a wide range of assets, including, possibly, funds which may not normally be available to individual investors.

If this investment choice is too much then the investor has the option of using the expertise of their Adviser or a third party specialist to guide them and manage an appropriate risk adjusted portfolio.

With the Life Office placing multiple deals on behalf of investors it allows them to negotiate reduced initial charges with the fund managers – the benefit of which is usually passed on to the investor. They are also able to ensure that the fund managers provide high service standards and sometimes education and support for Advisers.

Perhaps one of the biggest benefits for investors is the convenience of being able to amalgamate a variety of investments into one product. This may save costs but will most certainly save time and effort. An offshore bond provides consolidated reporting without the individual paperwork, dividend receipts and tax returns usually associated with holding a portfolio of investments. With on-line client access investors will also be able to view their investment portfolio in one place rather than across multiple sites.

With all investments being held in one clearly identifiable product it offers the ability to place the offshore bond into a trust. Assuming trusts are recognised in the client’s country of residence this could be useful as part of a generation planning exercise. It may also be helpful if the investor has a complicated family situation, wanting to simplify probate or is self-employed and looking for some form of asset protection. Most international Life Offices have a range of trusts available to suit common situations and may be complemented by a professional trustee service which is often heavily subsidised.

The ability to take regular withdrawals from their investments is very important for some investors. For example if you are in retirement and require a tax interoffice regular income, or if you are saving for the long term but would like access to 5% ’emergency income’ at any time.

It is high rate tax payers who are likely to benefit most, as they can defer taxation to a time when their tax liability will be less. Taking a 5% annual withdrawal now, and not paying tax until a time that best suits their personal circumstances.

As with all financial products, it is important to ascertain whether any financial benefits such as reduced taxation are not impacted by fees. Both the product provider (life insurance company) and your financial advisor could potentially take initial and annual fees from your investments. Ensure that fees and costs are fully transparent, and request a cost-benefit-analysis that takes into account the product and all associated fees.

Whilst every effort is made to ensure the accuracy of the information provided, it should not be relied upon to make any financial decisions. Always seek professional financial advice first. Whilst research was done to ensure accuracy at the time of writing, relevant laws can change at any time, and hence the information may not be up-to-date with current legislation. This website and its content is purely for educational use.

About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

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