Offshore Bonds

Tax treatment of an offshore bond?

What is an Offshore Bond?

An offshore bond is a lump sum life assurance policy which is established outside the United Kingdom. The amount of life cover is minimal, and offshore bonds are taken for investment growth and not life cover. 

These policies offer you the opportunity to invest in pooled or collective funds that provide access to a wide range of investments.  The funds are managed by professional investment mangers, which should increase your return and reduce the risk your investments are exposed to. 

Back to start of page 

Tax treatment of an offshore bond? 

Offshore bonds are particularly attractive for those who are planning to retire overseas (or work abroad).

    

Offshore bonds have potentially more favorable tax treatment than onshore bonds. The different tax treatment of offshore bonds and onshore bonds can make a substantial difference to the returns. Whether an offshore bond or onshore bond is more appropriate for you will depend on your individual tax status, the types of assets you choose to hold and the term you are likely to invest over. 

The taxation of an offshore bond is governed by the tax regime of the country where the life office is established. Most offshore life companies are therefore set up in places where income and capital gains made on non-resident policyholder funds are not taxed locally.  This means that an offshore bond grows virtually free of income tax and capital gains tax charges - unlike comparable onshore bonds which suffer tax on income and capital gains.

Dividend and other income the life office receives from other territories may be subject to non-recoverable withholding tax. The effect of withholding tax can be minimized by investing for capital growth rather than income. 

As with onshore bonds, you can take regular withdrawals from offshore bonds, accessing your capital in a tax efficient way by withdrawing up to 5% of the amount initially invested every year as "income".

Back to start of page

This 5% amount can be taken every year for 20 years, or accumulated over a number of years and withdrawn less frequently without triggering a 'chargeable event 'for tax purposes (a 'chargeable event 'occurs for example when an amount over 5% a year is withdrawn, or if the bond is cashed-in in full, triggering an income tax charge.) 

You can choose or exercise control over when a ‘chargeable event' occurs. The tax payable at the point of a chargeable event will depend on your highest marginal rate at that time. This allows you to defer such an event until you are either no longer a tax payer or have moved from being a higher rate tax payer to a lower or basic rate tax payer or moved to country with lower taxation.     

Offshore bonds are also useful in estate planning, as they can be gifted (or assigned) to a third person without incurring a tax charge. 

Fund switches made within offshore bonds do not trigger a capital gains tax liability. Such switches within a portfolio of onshore direct equity or unit trust investments trigger a potential capital gains tax liability for the tax year in which the switches were made. Offshore bonds often therefore provide a more tax efficient structure for active investment management.

Back to start of page