The key benefits of offshore bonds

In addition to avoiding CGT, while your investments remain inside the offshore bond wrapper, you won’t have to pay Income Tax. 

This is referred to as ‘gross roll up’ which allows your money can grow faster since it isn’t subject to taxes.

You also don’t have to pay UK Corporation Tax on any gains, and you can switch between different funds within the offshore bond without causing any taxable gains.

(* a small amount of withholding tax may apply)

For each amount you invest in an offshore bond, you can withdraw up to 5% of that amount each year for 20 years without paying immediate income tax. 

If you choose not to take the full 5% allowance in any year, the unused portion carries over to the next year. This means you can accumulate these allowances over time.

For example, if you made an original investment of £200,000, you could withdraw £10,000 per year for 20 years and would not need to pay tax at the time of taking. If you decided not to take any withdrawals for the first five years, then you would have a cumulative allowance of £60,000 in year six.

The allowance is treated as the return of your original investment and continues until such a time that the original investment has been fully drawn.

Withdrawals over the 5% allowance will be liable to tax, however, there are two different ways you can partially encash your investment and, with the correct advice, legitimately manage the tax you pay.

When you decide to cash in your bond, any gains are taxed at your current income tax rate. However, if you are currently a higher-rate taxpayer but expect to become a basic-rate taxpayer in the future (for example, when you enter into retirement), you can delay cashing in your bond assets until retirement and possibly halve the rate of tax due on any gains.

Be sure to ask your financial or tax adviser about how top-slicing relief works to reduce the tax  on your gains.

Furthermore, you can offset gains against any unused personal allowance, the starting rate of 0% and the personal savings rate, if applicable.

This might not sound like a benefit, but if you were looking at different options for investing for say, your children or grandchildren, the offshore bond presents an opportunity to meet this objective and unlike a junior ISA, you have control over when your child can have access to the money.

The way this works is that the bond is divided into equal segments. So, for your £200,000 investment, you could have 20 segments of £10,000 each. If you then chose to gift £100,000 to your child, you could assign 10 segments of the bond to them without having to encash any investments and without incurring a tax charge at that point.

If your child is a non-taxpayer, there could be no tax to pay when money is withdrawn. If your child is not a minor, they could also benefit from any unused 5% withdrawals carried over on the segments assigned.

If you do decide to gift some or all of your offshore bond to your child (or somebody else), you have the option of putting it into Trust, unless your child is a minor in which case it would have to be held in a Bare Trust via a deed of appointment. This will enable you to keep control over when the money can be accessed.

Trusts can also be used for other tax planning opportunities such as Inheritance Tax (IHT) Planning. A Discounted Gift Trust or a Loan Trust are both excellent ways of minimising IHT whilst still retaining income or some access to your investment capital. Watch out for our upcoming articles which explain how these products work.