Offshore Investments
An offshore investment bond works in much the same way as an onshore one. It is a life assurance policy used as an investment vehicle, holding funds you choose, with no fixed term. The difference is where it is issued, typically Dublin, the Isle of Man, Guernsey or Luxembourg, and the tax treatment that follows from that.
Offshore here does not mean hidden or aggressive. These are mainstream contracts from large insurers, reported to HMRC in the ordinary way, and used because of a specific tax mechanism rather than because of any secrecy.
Gross roll up
An onshore bond pays tax internally on the income and gains of its funds. An offshore bond generally does not, beyond withholding tax deducted at source on some overseas dividends which cannot be reclaimed. The fund therefore compounds without an annual tax drag, and over a long holding period that difference can add up.
Nothing is avoided, only deferred. The tax arrives when you take money out, and that is where the planning sits.
How gains are taxed when you cash in
No basic rate credit
Because no UK tax has been paid inside the bond, the whole gain is taxed as your income in the year of the chargeable event, at your marginal rate. That is the main practical difference from an onshore bond, where basic rate is treated as already settled. An offshore bond can therefore work well if you expect to be a lower rate taxpayer at the point you encash, and poorly if you expect to be at the top of the scale.
Offshore bond gains count as savings income, so the personal savings allowance and, for someone with modest other income, the starting rate for savings can be set against them.
The 5% rule
As with an onshore bond, you can withdraw up to 5% of the original premium each policy year with no immediate charge, carrying forward what you do not use, until 100% of the premium has been taken. Go beyond the cumulative entitlement and the excess becomes a chargeable gain in that tax year, whether or not the bond has actually made a profit.
Top slicing and time apportionment
Top slicing relief applies as it does onshore, spreading the gain across the years held for the purpose of the higher rate calculation. Offshore bonds also carry time apportionment relief. If you were not resident in the UK for part of the period you held the policy, the taxable gain is reduced in proportion to that period. For someone who has spent years working abroad this can remove a large part of the liability, and it is a common reason for taking an offshore bond out in the first place.
Where the bond is issued, and what protection applies
The Financial Services Compensation Scheme covers policies issued by UK authorised insurers. An offshore bond is issued elsewhere, so a different regime applies. The Isle of Man operates its own compensation arrangements covering a proportion of a claim. A policy issued in Dublin relies on Irish and European regulation, with no equivalent policyholder compensation scheme behind it. None of that rules an offshore bond out, but the jurisdiction is part of the decision rather than a footnote to it.
The personal portfolio bond rules
If a bond allows you to select individual assets of your own choosing, rather than picking from a defined range of funds set out in the contract, it can fall within the personal portfolio bond rules. Where it does, HMRC deems a gain of 15% of the premium plus previous deemed gains every year, taxable whether or not anything has been earned, and it compounds year on year. Properly structured contracts are written to stay outside these rules, but it is worth confirming rather than assuming, particularly with an older policy or one arranged overseas.
Costs and investment range
Offshore bonds usually offer a far wider investment range than onshore versions, often across several currencies and including institutional share classes not otherwise open to private investors. They generally cost more to run, with an establishment charge and an annual product charge sitting on top of fund costs. The benefit of gross roll up has to be big enough to outweigh that, which in practice means a substantial sum and a long time horizon.
Getting advice on this
An offshore bond is worth looking at if you expect to move abroad, if you have returned to the UK after time overseas, or if you have used your other allowances and are investing a large sum for the long term. It is the wrong answer for a modest amount of money over a few years, and it is not something to arrange from a brochure.
Heritage is an independent, family run firm in Taunton, advising clients across Somerset and the South West since 2000, directly authorised by the Financial Conduct Authority under firm reference 624976. If you already hold an offshore bond, or you are being offered one, we can look at whether it actually does what you need it to do.
The value of investments and the income from them can fall as well as rise. You may get back less than you invested. Tax treatment depends on your individual circumstances and may change in future.
The taxation of offshore bonds is complex. It depends on your residence position over the period you hold the policy and at the time money is taken out, on the jurisdiction the policy is issued from, and on your other income in the year of a chargeable event. Offshore policies are not covered by the Financial Services Compensation Scheme, and the protection available to you depends on where the policy is issued. Advice should be taken before taking a bond out, before making a withdrawal, and before any change in your residence.