OFFSHORE BONDS
Offshore bonds are a highly effective and tax-efficient way to grow and draw your wealth over the medium to long term. They’re great for:
- those with a lump sum to invest upfront clients looking to draw a higher income without incurring additional tax
- individuals planning ahead to pass on their wealth and mitigate inheritance tax (IHT)
An offshore bond is a tax wrapper issued by a life insurance company outside of the UK. They offer a phenomenal range of advantages when used alongside other accounts and investment types.
Growth in a tax-free environment
Whilst your funds are inside the offshore bond, they are not subject to any tax. This allows the funds to benefit from what is known as ‘gross roll up’.
This means that any growth created by the investments inside the bond ‘rolls up’ over time without having a bite of income or capital gains tax taken out on a yearly basis. The entire amount, including returns, is reinvested over and over. This creates an excellent position for growth as the earnings compound over time.
Offshore bonds are not entirely free of tax and are certainly not a tax avoidance scheme. Tax is simply deferred – it becomes due when you draw on the bond in certain ways or when you surrender it.
Drawing tax-efficient income
Offshore bonds enjoy an extremely favourable tax position which makes them a great option for mitigating certain tax liabilities, particularly when it comes to drawing an income.
This is due to the 5% withdrawal allowance, which allows the bond holder to withdraw up to 5% of the original premium paid into the bond without an immediate UK tax liability.
An example of the 5% withdrawal allowance
If you invested £750,000 in an offshore bond, you could take up to £37,500 back out of it each year without triggering a chargeable event. The rest of the funds stay invested (including any gains). They continue growing and compounding in a tax-free environment, until you are ready to cash in all or part of the bond. Used alongside other income streams, this can provide a tax-efficient boost to your liquid cash.
For the best results, and depending on your needs, we’ll often use offshore bonds alongside a blend of other tax wrappers and income streams.
Passing on wealth and lowering IHT liability
Alongside their other benefits, offshore bonds can be a very effective tool when it comes to estate planning, particularly when used in combination with Trusts.
A Trust can be set up within an offshore bond. When you pay into the Trust, the 7-Year Rule clock starts. After the 7-year window, the funds within the Trust portion of the bond are outside of your estate for IHT purposes and can continue to grow inside the offshore bond without increasing the value of your estate.
Another way to use offshore bonds for passing on your wealth is by using segmentation. You can split up (or “segment”) the full value of your offshore bond into as many pieces as you like. These segments can then be gifted on to your beneficiaries during your lifetime.
For more information on offshore bonds for IHT planning, click the button below.
Using an offshore bond to
generate income
Fiona came to Tideway after she received a £1 million divorce settlement. She had recently returned to full time education and was about to begin a PhD, so she knew she would be without a formal income for at least four years.
Fiona wanted to use the divorce settlement to generate an annual income of £48,000 in as tax-efficient a manner as possible. Learn more about how we arranged Fiona’s finances to reach this position.
Regulations around
offshore bonds
Currently, it is not possible to set up an offshore bond yourself. The rules around offshore bonds and their complexity mean that you can only open one via an authorised financial adviser or wealth manager. The offshore bonds we administer are provided by Canada Life.
An experienced and knowledgeable wealth manager will first advise on whether an offshore bond is suitable for you and your goals. If it is, they will ensure that it is perfectly positioned within your wider wealth management strategy and investment portfolio, taking into consideration your overall tax position, risk tolerance, and financial goals.
Passing on wealth with an
offshore bond
Mary and Clive are married, in their late 40s, and have two children under 12 years old. They received an inheritance of £600,000 following the death of a relative, which they wanted to use for the benefit of their children; first to pay for their education, and later to pass on as capital.
We recommended an offshore bond as the best way to achieve these aims whilst enjoying favourable tax treatment and a fertile growth environment.
Read on to find out how this worked in practice and the reasons why we recommended this method.
How could an offshore bond work for you?
Offshore bonds can form a very powerful and hard-working element of your overall financial plan, no matter what your aims or needs are. Talk to us today to find out if you could benefit from including one in your own wealth management strategy.