Offshore Bonds

Gift wrapped box in brown paper/string

Deborah Benn 20th March 2010 12.20pm

Wrapping Up Your Investments 

We take a look at what offshore bonds can do for you.

Offshore bonds are a clever way of effectively placing a ‘tax wrapper’ around your investments to ensure you make the most of any tax planning opportunities while you live and work abroad. Below we have listed the main advantages as well as some things to watch out for.

Flexibility: A wide choice of investment possibilities. You can place cash deposits, funds as well as OEICs and alternative investments into an offshore bond.

Tax control: A key feature of offshore bonds is the ability to time (where possible) any investment withdrawals - called a chargeable event - to coincide with when you are in a low tax bracket or low tax jurisdiction. This is called tax deferment.

Tax advantages: With the exception of any possible withholding tax, your investments grow tax free. You will of course have to pay tax when you cash in all or part of your investment depending on the tax regime where you are resident, although as explained above encashment can be timed to ensure you are not in a high tax bracket.  However, fund switches will not trigger a tax liability within an offshore bond and you do have the right to withdraw up to 5% of the initial investment each year for 20 years without an immediate charge to tax.

Trust: You can place offshore bonds in trust, which will help with inheritance tax planning.

Segmentation: The offshore bond can be split into a number of different segments, which helps to realise gains tax efficiently over a number of years.

Household names: Many of the offshore bond providers are offshore arms of UK financial service companies such as Axa and Prudential.

Things to consider:

  • Offshore bonds are not really suitable for investments of less than £10,000
  • They are for the long term and not really to be considered for an investment horizon of less than 10 years. Charges are loaded in the early years and penalties will apply if you try and withdraw money in the first few years.
  • Check that the offshore bond provider does not limit you to their own funds. Make sure you are allowed to invest in external fund managers.
  • Think ahead! How old and where will you be when you are likely to need to encash your investments. Ideally you should be in a low tax jurisdication or low tax bracket.
  • Location. Make sure your offshore bond is in a well regulated centre with a company you know and trust.
  • Such flexibility doesn’t come cheap! Check out the product and fund charges. Charges are loaded in the early years and penalties will apply if you try and withdraw money early on.