Offshore investment bonds are popular savings vehicles that defer tax, whilst allowing for gross rollup of the investment (growing without tax deducted on the underlying investments). Never heard of them? Then you could be missing out on crucial tax savings.
What is an offshore investment bond?
An investment bond is a single premium life assurance policy where you can invest into a wide range of funds and asset allocation classes as selected by you.
The minimum investment is usually £5,000, but product providers will differ. Offshore investment bond providers are to be found, in the main, in the Isle of Man, Guernsey and Jersey, as well as Dublin, for UK investors. The offshore status gives certain tax advantages to the investor.
Tax deferral on offshore investment bonds
Each year the investor could draw down up to 5% of the original investment on a ‘tax deferred’ basis. These 5%’s are cumulative, so if you draw down nothing for say 4 years, you can then draw down 4 x 5% =20% without immediate tax being payable.
Tax deferred means that no tax is payable on the withdrawal up to 5% p.a. but there could be a tax charge on maturity of the investment, or surrender of it, or on the portion withdrawn above 5%, and death of the last life assured. These are known as ‘chargeable events’.
What’s the difference between onshore and offshore investment bonds?
It is important to differentiate between an onshore and an offshore investment bond.
| Differences | Onshore (UKBond) | Offshore (non UK) |
| Investment Growth | Taxed annually at 20%, after exemptions | Gross roll-up – no tax,apart from some withholding tax |
| Minimum Age | None | 18 |
| On maturity/surrender | | |
| Basic rate taxpayer | No further tax as deemed paid at 20% | Gain taxed at 20% |
| Higher or additional rate | Added to taxable income less 20%, with top-slicing relief | Gain taxed at marginal rate, with top-slicing relief |
| If non resident at maturity | Rules of foreign country apply | Rules of foreign country apply |
| | |
| Similarities | | |
| Withdrawals | Up to 5% p.a. tax deferred | Up to 5% p.a. tax deferred |
| Capitalgains tax | None | None |
| IncomeTax | Yes on gains | Yes on gains |
| Defer tax charge | Up to 20 yrsor longer | Up to 20 yrs or longer |
Assign segments to lower rated taxpayers who encash at lower tax rates | Yes | Yes |
It will generally be better from a tax point of view to surrender individual segments of the investment bond instead of surrendering parts of the whole investment bond.
As investment bonds are deemed to be non-income producing, taking the 5% withdrawal is tax efficient. This is particularly the case for trusts, where taxation of income-producing assets can be at 50%. No annual tax returns are required for individuals or trustees.
Pros and cons of offshore investment bonds
An offshore investment bond has advantages as well as disadvantages. Advantages include tax free growth of investment funds, fund switches within the bond do not give rise to a CGT or income tax liability on the investor, and there are no tax reporting requirements. The offshore investment bond can be assigned as a gift without income tax payable (also if gifted to a trust), and for the age allowance, the 5% withdrawals are not treated as income.
However, there are disadvantages, and these include chargeable event gains that can suffer tax at up to 50% on encashment of a bond; there are no ways to use a capital gains tax allowance as gains are subject to income tax; and on the death of the last life assured, there could be inheritance tax and income tax due.
Practical offshore investment bond tip
A UK resident but non-domiciliary investor can change offshore assets to an offshore investment bond to avoid the £30,000 (to be increased to £50,000) annual ‘remittance basis’ levy, and still have regular withdrawals without immediate taxation. Also, offshore investment bond investments could be excluded for the capital means test for those going into residential care.
As always, investments carry risk, and specific professional advice should be obtained.
Offshore investment bonds are popular savings vehicles that defer tax, whilst allowing for gross rollup of the investment (growing without tax deducted on the underlying investments). Never heard of them? Then you could be missing out on crucial tax savings.
What is an offshore investment bond?
An investment bond is a single premium life assurance policy where you can invest into a wide range of funds and asset allocation classes as selected by you.
The minimum investment is usually £5,000, but product providers will differ. Offshore investment bond providers are to be found, in the main, in the Isle of Man, Guernsey and Jersey, as well as Dublin, for UK investors. The offshore status gives certain tax advantages to the investor.
Tax deferral on offshore investment bonds
Each year the investor could draw down up to 5% of
... Shared from Tax Insider: Offshore Investment Bonds – Are You Missing Out?
FAQs
They can be very effective if you've used up your pension and tax allowance, and still have funds available to invest tax efficiently. Bonds can also be helpful when it comes to estate planning, in some circ*mstances to sensibly guard against unnecessary Inheritance Tax.
What is a disadvantage of an offshore investment bond? ›
Offshore investing is beyond the means of many but the wealthiest of investors. Advantages include tax benefits, asset protection, privacy, and a broader range of investments. Downsides include high costs and increased regulatory scrutiny that offshore jurisdictions and accounts face.
What is the 5 rule for offshore bonds? ›
Q. What is the 5% tax deferred allowance? A. This is a rule in tax law which allows investors to withdraw up to 5% of their investment into a bond, each policy year, without incurring an immediate tax charge.
What happens after 20 years with an offshore bond? ›
For someone, who has been taking 5% withdrawals from the outset this will mean withdrawals taken after 20 years will result in a chargeable gain. If the bond is incremented the added funds will have their own 5% allowance in addition to the allowance available to the original funds.
What are the pros and cons of offshore investing? ›
As well as potential tax advantages, you may also benefit from asset protection and more privacy. All this can create opportunities to generate higher returns. But it could also expose you to higher risks, with increasing regulatory scrutiny on a global scale and higher costs associated with offshore accounts.
What are the pros and cons of bonds investments? ›
Con: You could lose out on major returns by only investing in bonds.
| Pros | Cons |
|---|
| Can offer a stream of income | Exposes investors to credit and default risk |
| Can help diversify an investment portfolio and mitigate investment risk | Typically generate lower returns than other investments |
1 more rowOffshore bonds grow in a virtually tax-free environment which is known as gross roll-up. Individuals can offset their gain against any unused personal allowance, the starting rate of 0% and the personal savings rate if applicable. Individuals may be able to make use of top slicing to reduce the tax payable on the gain.
Are offshore bonds tax free? ›
There is no tax relief applied to contributions to an offshore bond, but there are some other great benefits. Offshore bonds are not subject to capital gains tax so capital gains can 'roll up' over time without any immediate tax charge. [3] Gains will be taxed as income but only once you access the funds.
How much does an offshore bond cost? ›
Offshore Bond Commissions
The total charges range between 9.5% and 10%. The actual cost of bonds can be as low as 0.25% per annum equating to between just 1.25% and 2.5% over the same term.
What happens to an offshore bond on death? ›
On death, ownership passes to any surviving joint owner or the deceased's PRs. If the PRs take ownership, they can choose to either encash the bond by surrender resulting in a chargeable event or assign ownership to a beneficiary of the estate.
What is the 5% Allowance? One of the main features of using an offshore plan is the ability to take withdrawals of up to 5% of the premium paid each plan year without triggering an immediate tax charge. This is known as the 5% allowance.
What is the 60 40 bond rule? ›
What is the 60/40 rule? The 60/40 portfolio is a simple investment strategy that allocates 60 percent of your holdings to stocks and 40 percent to bonds. It's sometimes referred to as a “balanced portfolio.” The 60/40 rule has been widely recognized and recommended by financial advisors and experts for decades.
What is the 10 year rule for bonds? ›
If you withdraw in the 10th year, one-third of your bond income is taxable, with a 30% tax credit applicable. Any withdrawals after 10 years offer the most significant tax benefit, as all income from the bond is tax-free.
Why use an offshore bond for a trust? ›
For an offshore bond, there is no tax paid at source, so the full rate would be payable in the event of a chargeable event. To avoid this, segments of the bond could be assigned to a non-taxpaying beneficiary and there would be no tax charge incurred on the bond.
What is the 10 year rule for investment bonds? ›
If the investment bond is held for 10 years or more, there is no additional tax payable on the investment earnings. This is called the 10-year rule.
Should I use an onshore or offshore bond? ›
The different way of taxing an offshore bond means that it might grow faster than an onshore bond, although this isn't guaranteed. However, you will pay income tax on any gain at your highest marginal tax rate because with an offshore bond, you're not treated as having paid basic rate tax on any gain.
Is it worth investing in international bonds? ›
International bonds are a great way to diversify a portfolio as the investor can gain exposure to foreign securities that may not necessarily move in tandem with securities trading on local markets.
