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Offshore Investment Bonds – Are You Missing Out?

By Tony Granger, June 2020

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up to 5% p.a. but there could be a tax charge on maturity of the investment, or surrender of it, or on the portion withdrawn above 5%, and  death of the last life assured.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 (UK Bond)  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 
Capital gains tax  None  None 
Income Tax  Yes on gains  Yes on gains 
Defer tax charge  Up to 20 yrs or 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.

First published August 2011. 

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

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