In the world of wealth management, selecting the right investment vehicle is essential for maximising returns and minimising tax liabilities. One option that often goes unnoticed is the offshore bond.
What Are Offshore / Onshore Bonds?
- Offshore bonds are financial products designed to help you grow your money over the long term. They are offered by insurance companies and work like a “wrapper” for your investments. You put in a lump sum of money (called a single premium) and choose from a variety of funds to invest in. These funds grow inside the bond, and the unique tax rules for offshore bonds mean that the growth isn’t taxed until you decide to take the money out.
- Onshore Bonds are based in the UK and are subject to a 20% tax on the profits made inside the bond (such as interest and capital gains). Offshore bonds, on the other hand, don’t have this internal tax, so your money can grow faster because it isn’t reduced by taxes while it’s invested.
Where do Offshore Bonds fit in for me?
When looking at your broader wealth you need to be aware of all the options available to achieve the most tax efficient outcome, ISA and SIPPs nearly always have a place in there. And offshore bonds don’t come far behind
The key part of an offshore bond is that it allows you to draw down 5% of your original capital annually. This is very powerful in that it lets you draw money tax free while still putting it to work, for example:
- Mary invests £100k into an offshore bond
- She requires an income from the bond to supplement her main income
- The bond is invested and generates 6% annually
- She can withdraw £5k (5% allowed annually) of her original investment with no tax consequences
- By having this structure in place she has paid zero tax, rather than up to 45% on the £6k growth
- The tax will be payable eventually when she draws the income portion out, but this could be many years later when her tax situation is different
What are the other benefits?
Tax efficiency:
- Offshore bonds allow your investments to grow without being taxed on interest or capital gains within the bond.
- Gains are only taxed when you withdraw funds, and even then, there are strategies to minimise the tax liability. Basic-rate taxpayers and non-taxpayers may avoid extra liability if the “top-sliced” gains do not push them into higher tax brackets. Top slicing is a method used to calculate the tax liability on gains from investment bonds. It spreads the gain over the number of years the bond has been held, potentially reducing the tax rate applied.
Income and Cashflow Planning
Offshore bonds allow you to take capital from the pot without suffering tax, this tax deferral means your assets can enjoy compounded growth without tax.
Flexibility:
- Offshore bonds can be written on multiple lives, meaning the bond continues as an investment even after the original owner passes away. Additionally, bonds are divided into segments, which can be transferred to beneficiaries.
- Example: A bond worth £100,000 is divided into 100 segments of £1,000 each. Upon the owner’s death, these segments can be transferred to multiple beneficiaries. For instance, if the bond is passed to two adult children, each child could receive 50 segments worth £50,000. If one child is a basic-rate taxpayer and the other is a higher-rate taxpayer, the gains can be distributed strategically to minimise overall tax liability.
No Investment Limits:
- Unlike ISAs, offshore bonds have no restrictions on the amount you can invest, making them ideal for individuals with substantial wealth.
