Offshore - Bonds - Investments - Knowledge Direct


Advantages of using an offshore bond

This article aims to provide an overview of the advantages and disadvantages of purchasing an offshore bond for UK resident clients.

There are many considerations which may influence any advice. These may include:

  • Simplicity
  • Price
  • Access
  • Risk profile
  • Fund choice
  • Currency
  • Future aspirations and objectives
  • Tax

These are client specific and as such form a key part of any recommendation made.

Taxation of the offshore bond

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

As the bond is invested with an offshore insurer, it does not suffer any income tax or CGT within the fund except for any un-reclaimable withholding tax that may have been applied. Any gains, dividends, rent or interest are taxed at 0% within the fund.

UK taxation of the bondholder

  • For individuals any chargeable event gains will be chargeable to income tax at their appropriate rate: 20%, 40% or 45%. Trustees will pay tax at 45%.
  • Taxpayers can use their personal allowance and the 20%, 40% and 45% tax bands when calculating overall tax liability. For trustees, the first £1,000 worth of chargeable event gains (assuming no other income) is taxed at 20%.
  • For highly personalised bonds it’s important to remember that for UK resident bondholders there is a deemed gain of 15% of the premium and the cumulative gains each year that is subject to income tax.

Advantages of the offshore bond

  • Bonds are non-income producing assets so there are no annual tax returns for individuals or trustees.
  • Funds can be switched within the bond without giving rise to a CGT or income tax liability on the bondholder and with no tax reporting requirements.
  • Switches in and out of funds are not subject to the CGT 30 day rule so will not give rise to a taxable event.
  • Income received gross within the bond will only suffer income tax on future encashment of the bond.
  • Income tax liability is reduced proportionally for time spent as non-UK resident.
  • The bond can be assigned by way of gift without giving rise to an income tax charge, although there might be inheritance tax (IHT) considerations.
  • 5% tax deferred allowances on each premium paid can be taken each policy year for 20 years without incurring an immediate income tax liability.
  • For the purposes of age allowance, withdrawals within the 5% tax deferred allowance are not treated as income.
  • Realised chargeable gains may benefit from top slicing relief, which can reduce or remove any higher rate liability and for offshore bonds the number of relevant years always refer to complete years since the bond started.
  • Top-ups will benefit from top-slicing from commencement of the bond (individuals only).
  • Using multiple lives assured for a life assurance contract can avoid a chargeable event on death of the policyholder.
  • Alternatively, a capital redemption contract where no lives assured are required can be used.
  • Can be gifted into trust and assigned out of trust without giving rise to an income tax or CGT charge.
  • Offshore bonds are not normally included where means testing is applied by a local authority for residential care.
  • Wide investment parameters.
  • Ability to appoint third-party custodians and discretionary managers.
  • Where a bond terminates and a chargeable loss is made due to a previous excess event, deficiency relief may be available. This can reduce higher and additional rate income tax liability for the tax year that a chargeable loss occurred.
  • The remittance rules for UK resident non-UK domiciled individuals do not apply to offshore bonds. Therefore, provided the capital invested into the bond is clean (no unremitted interest or gains) then no income tax is payable until a chargeable event occurs and there is no CGT payable.

Disadvantages of the offshore bond

  • On encashment, chargeable event gains can suffer income tax up to 45%.
  • As withdrawals from a bond are assessable to income tax, it’s not possible to use personal or trustee CGT allowance to reduce gains.
  • Base cost of the investment is not re-valued on death for income tax purposes (chargeable event gains are assessable against original investment and any subsequent additional premium paid).
  • Death of last of the lives assured on life assurance contracts will create a chargeable event (even if policyholders are still alive).
  • Chargeable event gains reduce any available age allowance based on the total gain, not sliced gain.
  • May not be suitable where ‘income’ interest exists inside a trust. Investment losses cannot be offset elsewhere.
  • On death of the last of the lives assured, income tax and IHT may be due.

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 at the top of this article. 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.

The content of this site is for advisers only. It is not for the use of Hong Kong advisers. You can change the regional content by selecting a region from the drop down box in the top right-hand corner.