UK taxation of offshore bonds, part 1

This article explains how personal portfolio bond taxation interacts with other UK chargeable events.

UK tax residents

Unlike most investments, any capital gain realised from a Bond is subject to income tax. The taxation of Bonds which is sometimes known as the chargeable events regime is contained within Part 4, Chapter 9 of the UK income tax legislation (Income Tax (Trading and Other Income) Act (ITTOIA) 2005).

Rules referred to collectively as 'the statutory residence test' will determine whether an individual is UK resident. These rules depend on a specific series of tests.

Chargeable events

Taxation of Bonds occurs when a gain arises on a specific event. These events are listed below and are collectively known as chargeable events:

  • Death of the relevant life assured for a life assurance bond.
  • Full assignment of a Bond for consideration in ‘money or money’s worth’.
  • Maturity of a Bond (where applicable).
  • Full surrender of a Bond (or Full surrender of policies within the Bond).
  • Regular withdrawals or one off cash amounts taken from the Bond (Part surrenders) in excess of the 5% tax deferred allowance.
  • Part assignment of a Bond for consideration in ‘money or money’s worth’ which are in excess of the 5% tax deferred allowance.
  • Loans made to the Bond owner against a Bond issued by the life company (i.e. Old Mutual International, OMII or OMIG) (known as 'Policy loans') which are in excess of the 5% tax deferred allowance.

The first four events are sometimes called Final Events as the Bond must come to an end or the ownership of the Bond must change for this event to be considered a chargeable event. The remaining three events are all periodic calculations which are assessed at the end of each bond year and relate to gains in excess of the 5% tax deferred allowance. They are sometimes known therefore as excess events.

Final event calculation

The formula for the calculation is the same for each final event*:

* Old Mutual International, OMII and OMIG do not calculate the chargeable gain on full assignments. They are only required to report the details of the assignment and the premium and withdrawal history and the commencement date of the Bond. The Bond owner must calculate and declare the gain in their tax assessment.

If there is no chargeable gain, then there is no income tax payable. If there is a negative result (or chargeable loss), this may be used to offset your higher rate income tax liability in certain circumstances. See articles on deficiency relief for more information.

**For policies issued on or after 21 March 2012, any previous excess gain in the final event calculation, where those excess gains have not been charged to UK income tax (for example, the policyholder was not UK resident at the time the excess events occurred) will be ignored for the purpose of calculating the chargeable gain.

This change will only affect policies which started before 21 March 2012, if after 20 March 2012, the policy:

  • is assigned in whole or part, or
  • used as security for a debt, or
  • has further premiums paid to the policy.

Insurers will still calculate the gain (or loss) including all previous excess gains for the purpose of reporting chargeable gains to the policyholder and HMRC, but when the policyholder comes to complete their self-assessment form, they will need to increase the gain (or reduce the loss) by any excess gains made while they were non-UK resident.


Chargeable gain on Chargeable Event notification + Previous excess gains where UK income tax has not been paid = Gain to be included in self-assessment


Death of the relevant life assured for a life assurance bond

The event date is the date of death of the relevant life assured. The relevant life assured is the life assured where there is only one life assured. Where there is more than one life assured, the relevant life assured is the last life assured to die.

If additional life cover has been selected on the bond (the Sum Assured), this amount is ignored for this calculation. Only the value of the bond less any early withdrawal charges that may be included in the calculation.


Mrs White takes out a bond for £100,000 with Old Mutual International on 1 August 2006. She is the sole bond owner and life assured. She dies on 8 May 2016, and her executors notify Old Mutual International on 10 June 2016.

The bond terminates on 11th June 2016 (next working day following receipt) as Mrs White is the only life assured. The event date for the chargeable event will be 8 May 2016 (date of death) and the value will be the Bond value on 8th May 2016. Mrs White’s executors will receive the value of the bond as at 11th June 2016 (plus any interest from this date to the date the benefit is actually paid). The executors will need to include the chargeable event gain in the late Mrs White’s income tax return for the year of her death and make payment of the tax from the estate.

Full assignment for consideration of money or money’s worth

The event date will be the date of the assignment. This event will only occur where the current bond owner transfers legal ownership of the Bond to a new Bond owner by executing a deed of assignment and the original Bond owner receives cash or assets/property in return for the ownership of the Bond.


Mrs Gray owns a Bond. It has a surrender value of £248,000. She sells the Bond to Mr White for £250,000 and executes a deed of assignment to transfer the ownership of the Bond to complete the sale on 1 May 2016. The date of the chargeable event is therefore 1 May 2016 and the value for assessment is £250,000 (the money she received for the sale). Mrs Gray is the assignor (the person selling the Bond and transferring ownership to another) and she is therefore the person liable to pay any income tax on the chargeable event gain.


If a Bond has a specified term, at the end of that term it will mature. The event date is therefore the maturity date.


Mr Black’s Bond commenced on 1 April 2006 with a term of 10 years. The maturity date of the Bond is therefore 31 March 2016. This is the event date for the chargeable event and the value on this date is the value for assessment of the chargeable event.

Full surrender

The Bond owner may request to full surrender their Bond at any time (subject to the Bond having a surrender value). The event date for full surrender is the date that Old Mutual International or OMIG terminates the Bond following receipt of a request to fully surrender. The value for the calculation will be the Bond value less any early withdrawal charges.


Mr Green requests full surrender of his Bond. The request is received on 1st June 2016; therefore if the surrender legally takes place on 2nd June 2016. The event date is 2nd June. The value on surrender is £245,000. This is the value used to calculate the chargeable event gain.

Excess events

The event date for excess events is the last day of the policy year. So, if a Bond commenced on 11th April 2016, the last day of the policy year would be 10th April each year.

However, where you have more than one excess event, or you have an excess event and a change of Bond owner in the same policy year, each excess event must be calculated in chronological order. This is unusual and therefore is not elaborated upon in this document.

The calculation for all excess events is the same:

*See section on part assignments for consideration below.

Cumulative tax deferred allowance (or 5% allowance)

At the start of each policy year, a tax deferred allowance is accrued of 5% of the premiums paid. If this allowance is not used it can be carried forward to use in future policy years. For example, if a Bond commenced on 1st July 2016 with a premium of £100,000. The tax deferred allowance would be £5,000 per policy year. If no part surrenders were taken, the tax deferred allowance at the start of the second policy year (1st July 2017) would be £10,000.

The allowance will stop accruing from the start of the 21st policy year. i.e. when 100% of the premiums paid has been accrued as a tax deferred allowance. However any unused tax deferred allowance can be used until termination of the Bond. For example, using the same Bond as above, if no part surrenders have been taken in the first 20 years, the accumulated tax deferred allowance is £100,000. Therefore, in year 21, it is possible to withdraw £100,000 by partial surrender without an immediate income tax liability.

Part assignment for consideration

A part assignment is a transfer of the Bond owner where at least one of the Bond owners after the transfer (or assignment) is the same as one or more of the Bond owners before the transfer. (i.e. Mr White and Mrs White transfers to Mrs White as Bond owner).

Where the part assignment is for consideration it will be a chargeable event and the value of the consideration will be the proportion of the Bond value (less any early withdrawal charges) relating to the Bond owner giving up their ownership. In the example, Mr White has given up 50% of the Bond value.

Policy loans

The value of the loan made against the Bond is treated as a part surrender for chargeable event purposes.

Regular premiums

When calculating chargeable events for regular premium Bonds, the only difference is the premiums used for the calculations. For final events, premiums paid means the total of all regular (and single where both are allowed) premiums paid. For excess events, the premium used for the tax deferred allowance will based on the annualised premiums at the end of the relevant policy year. For example, £500 a month is paid to a Bond, so the tax deferred allowance will therefore be:

End of policy year

Annualised Regular Premiums

Tax deferred allowance (5%)







Part surrender versus Full surrender of policies

Bonds offered by Old Mutual International or OMIG to UK Bond owners have more than one policy. Each policy is a contract in its own right with part of the premium and part of the benefit applying to each policy, but for our administrative convenience we administer certain transactions such as part surrenders to all policies proportionately.

It is however, possible to fully surrender one or more of these policies to receive some of the value of the Bond instead of requesting a cash sum across all the policies (a part surrender).

As illustrated above, the calculations for full and part surrender are different. The tax rules for part surrenders do not take into account investment performance whereas the tax rules for full surrenders do. When considering taking some of the value from the Bond it is important to consider both methods to decide which is most suitable in terms of the chargeable event gain that will be calculated and when this event will occur.


Mr Brown started a Bond four years ago with an investment of £100,000. He now wishes to take a withdrawal of £30,000 from the Bond and he has not taken any withdrawals from the Bond previously. The surrender value of the Bond today is £110,000 and it has ten policies.

The following compares taking the withdrawals by part surrender across all policies or by full surrender of individual policies.

Part Surrender

5% tax deferred allowance is £5,000. Cumulated for 4 years is £20,000.

£30,000 less £20,000 = £10,000

Gain of £10,000 liable to income tax at the end of the current policy year.

Full surrender of individual policies

Surrender value for each policy is £11,000 (£110,000/10). Three policies need to be surrendered.

Surrender value + Part Surrender


Premium + Excess

= Gain

11,000 + 0


10,000 + 0

= 1,000

Gain per policy X number of policies = Gain/ Loss

£1,000 X 3 = £3,000 which is immediately liable to income tax.

Type of Surrender


Part Surrender


Full Surrender of individual policies


Therefore on a pure tax consideration, the chargeable gain is lower if you fully surrender three policies to receive approximately £33,000 (unit prices and therefore value can fluctuate daily) than if Mr Brown took a part surrender of £30,000 on this occasion.


Once a chargeable event gain has occurred, there may be ways in which to reduce the amount of tax payable. Please see our article'UK taxation of offshore bonds, part 2'.

Personal Portfolio Bonds – a further chargeable event

Old Mutual International, OMII and OMIG do not offer this type of bond to individuals in the UK as UK tax resident individuals are subject to UK income tax on a further annual chargeable event. The rules are contained in sections 515 to 526 of ITTOIA 2005. In addition to the other chargeable events, a yearly deemed gain equal to 15% of the premium compounded is subject to UK income tax.

Bond owners returning to the UK who hold either an Old Mutual International Executive Redemption Bond or an Old Mutual International Executive Investment Bond or an OMII European Executive Investment Bond should seek advice on what action they should take before returning to the UK as these Bonds are considered personal portfolio bonds. 

Our bondholder tax reporting obligations

Old Mutual International, Old Mutual International Ireland and Old Mutual International Guernsey (OMIG)’s have an undertaking with HM Revenue and Customs (HMRC) to report chargeable events for UK resident bondholders.

For a bond that started on or after 6th April 2000 we will report any gain that exceeds 50% of the basic rate income tax threshold for the relevant tax year to HMRC. We will also report any chargeable event gains to the UK resident bondholders.

It is important to remember that we do not deduct any income tax at source. It remains an obligation of the policyholder to report all gains to HMRC irrespective of the amount.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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