What is an offshore bond?

14 Jun 2024

A wealthy individual considering an offshore bond

An offshore bond is a tax-efficient investment wrapper, set up by a life insurance company that is resident in a jurisdiction with a favourable tax regime, and within which an individual can invest in different types of assets, including equities, fixed interest securities, property and cash deposits.

The range of investments available is largely comparable to a traditional onshore portfolio, which includes the option to allow a discretionary investment manager to structure the investment bond in the same way that they would for any other type of investment portfolio.

The bond enables individuals to invest funds over the medium to longer term, with the sum payable on redemption linked to the performance of the portfolio held within the policy.

How can an offshore bond be established?

It’s important to ensure that the offshore bond is structured correctly when it’s first established, because this generally cannot be changed once the plan is created.

Investment into an offshore bond can either be made by way of a lump sum payment, or as regular payments. For UK tax purposes, both an offshore lump sum payment plan and a regular payment plan can be written on either a life (whole of life) assurance or a capital redemption basis:

  1. Where a plan is written on a life assurance basis, the plan will come to an end on the death of the sole or last surviving (in the case of multiple lives assured) life assured.
  2. Where a plan is written on a capital redemption basis, it has a fixed term.

One of the primary considerations should be the number of policies (or segments) created. When set up correctly, this can provide a large degree of flexibility over withdrawals and assignments in the future, and also creates opportunities for optimising the income tax position.

There is also flexibility to choose how the policy is held eg by an individual, by a company or by a trust. Additionally, should the policyholder be a trust or company, the entity could be UK or non-UK resident.

How are offshore bonds taxed?

Generally, an offshore bond is outside the scope of UK tax, and therefore the investments held within the underlying portfolio can grow tax free during the life of the bond; however, there may be withholding taxes applied by third-party countries, which are automatically deducted from income or gains at source and cannot be reclaimed.

For the investor, an offshore bond will generally be outside the scope of capital gains tax (CGT), assuming it’s not acquired for consideration, which enables the policyholder to gift the policy, or individual segments of it, without a tax charge.

Life bonds are subject to an attractive regime, which provides a holder with the ability to withdraw up to 5% of the initial sum invested each year over the course of 20 years, without attracting a UK tax charge –even if the underlying assets are standing at a gain. If for any year the 5% allowance is not used, or is only used in part, the allowance “rolls over” to the next year, increasing the effective amount of the allowance in following and future years, until 100% of the amount invested is withdrawn.

If more than the 5% annual allowance is withdrawn, the individual is taxable under the chargeable event regime, which taxes actual and deemed gains that are triggered when certain events occur, referred to as “chargeable events”. The gains are charged to income tax at the individual’s marginal rate of tax (up to 45%) in the tax year in which the chargeable event gain occurs.

While not exhaustive, a chargeable event will generally arise on the following occasions:

  1. The full surrender of the policy or of individual policy segments.
  2. A partial surrender of the policy or of individual policy segments ie withdrawals from the policy exceeding the 5% cumulative tax deferred allowance in any policy year.
  3. The full or partial assignment of rights under the policy for consideration in “money or money’s worth”.
  4. The falling due of a payment under the policy eg on the death of the last life assured or on the maturity of the policy, which give rise to the death benefit becoming payable.
  5. A fundamental reconstruction of the policy eg an addition or a removal of a life assured.

The chargeable event gain deemed to arise is broadly calculated based on the growth in value of the policy at the date of the chargeable event.

Liability to UK tax on a chargeable event is dependent upon the residence position of the policyholder. Therefore, if an individual is non-UK resident at the time a chargeable event gain occurs, there is generally no UK tax charge. However, where an individual is UK resident at the time of a chargeable event, but has previously been non-UK resident for some time during the policy term, the resulting gain chargeable to tax is proportionately reduced.

Policies held within trusts or companies

Where a life policy is held by a company, the chargeable event gains will arise to the company. For a UK resident company, this will result in a corporation tax charge. For a non-UK resident company, the company itself will likely not have a UK tax charge, but the chargeable event gain may be taxed under anti-avoidance provisions.

Where a life policy is held by a trust, the settlor will remain taxable on chargeable event gains arising on the policy while they are alive and UK resident, even if they cannot benefit from the trust. If the trust creator is not living or is not UK resident, then the trustees will pay the tax at the trust rate of 45% if the trust is UK resident. For non-UK resident trusts, the liability to tax falls to the UK resident beneficiaries if certain anti-avoidance rules apply and they receive a benefit from the trust.

Personal Portfolio Bonds (PPB)

The tax treatment of an offshore bond differs if it is considered to be a personal portfolio bond (PPB).

For an offshore life bond to be a PPB, certain conditions will need to be met. Broadly it’s a bond that provides the policyholder with an ability to select investments within the underlying portfolio. The tax treatment of these bonds is particularly punitive, which means that they are not generally recommended as part of a wealth planning tool.

Are there any specific tax considerations of an offshore bond for a non-dom?

An offshore bond has specific considerations applicable to , which must be considered before this is considered as an alternative (or an additional) planning tool.

If an offshore bond is used by a non-dom to invest their “clean capital”, the 5% annual withdrawals represent tax-free capital that can be used freely in the UK. Similarly, if a non-dom invests their foreign income and capital gains which were subject to the remittance basis (“mixed funds”), the 5% withdrawals will be derived from these funds and will need to be kept offshore to avoid a taxable remittance.

If a non-dom makes a withdrawal over 5% or otherwise triggers a chargeable event gain, this will not be eligible for the remittance basis and will therefore give rise to an immediate tax charge.

If an offshore bond is used by a non-dom to invest their mixed funds, there is usually no restriction on avoiding investing the funds in UK situs assets within the policy. This may help to simplify investment selection and eliminate the risk of taxable remittances.

Generally, all income and gains will be protected from tax by the wrapper, and therefore non-doms do not need to claim the remittance basis or pay the remittance basis charge. This tax-free gross roll up continues even after becoming deemed or actually domiciled in the UK. We’d expect similar treatment under the new proposed tax regime applicable to non-doms from 6 April 2025.

Download PDF – English version       

Download PDF – Russian translation

How we can help

We support a range of clients with interests both in the UK and internationally. If you have any queries regarding offshore bonds and how they can be utilised as part of structuring your own wealth planning, please contact Alexandra Britton-Davis.

Contact Us

Alexandra Britton-Davis
Partner, London

Key experience

Alex advises high net worth individuals, trustees and family offices on their UK tax affairs, estate and succession planning. In...