What are Expat Offshore Investment Bonds?
An offshore investment bond is an investment wrapper that can be used as an investment vehicle to control when you pay tax, how much you pay and whom you pay it to. Offshore investment bonds are also referred to as portfolio bonds and tax wrappers.
An offshore investment bond is a wrapper set up by a life insurance company and domiciled in a jurisdiction with a favorable tax regime, such as the Isle of Man, Luxembourg, or Guernsey.
Increasingly, international clients are also opting to use Dublin to benefit from perceived increased regulatory protection and tax efficiency.
Internationally, offshore bonds are typically provided by global life insurance companies such as Friends Provident International, Old Mutual International, RL360, Generali Worldwide and Zurich International.
Within an offshore investment bond, investments benefit from growth that is largely free of tax – often referred to as gross roll-up.
This can have a significant impact on returns, as we will show you below.
Unless the money from within the offshore bond – as either income or capital – is brought into the UK, it is not subject to UK taxes.
Investors must therefore be aware of the tax regime in which they are resident when they encash their bond.
Choosing the provider and location of your offshore bond is therefore important, as this will dictate many of the rules surrounding taxation and access.
Many of the offshore bonds available are transparent, low cost, efficient tax planning structures – although great care must be taken considering such a tax wrapper.
Why issue bonds offshore?
An offshore bond is a tax efficient wrapper that can hold a variety of assets, like stocks and shares or mutual funds. One reasons bonds are issued offshore is because this adds the legal and tax shield of a life insurance policy to an investment portfolio. The offshore investment bond can be structured to combine a life insurance policy and a portfolio to create a wrapper that investors can buy, manage and sell their assets through.
There can be potential tax advantages and investor protection advantages when issuing this type of bond offshore.
The closest onshore equivalent is an open-ended investment company (OEIC). Offshore investment bonds, also known as portfolio bonds or wrappers, should not be confused with traditional bonds.
Traditional bonds are fixed income investments where investors lend money to an entity (typically a company or government) which borrows the funds for a defined period of time at a variable or fixed interest rate.
One of the major differences between onshore and offshore bonds is that taxation is deferred within an offshore bond due to low (or no) tax on gains and income arising on the underlying investments during the term of the investment.
Do offshore bonds generally work?
Because we review a lot of offshore bonds and providers, a commonly asked question is ‘do these offshore bonds work’ particularly for international executives. They are certainly sold prolifically to those with lump sums to invest, but they are not always sold with transparent fee structures, and that can be the undoing of an otherwise excellent solution.
Therefore, the answer to this question is – yes, offshore bonds work well for many investors for whom they are suitable, but only when they are not subject to commission charges and high ongoing costs.
Are offshore investment bonds taxable?
Your personal tax status will determine whether your investments are taxable, and at what rate.
In very general terms, offshore bonds can offer regular withdrawals that give investors access to capital in a tax-efficient way by enabling the withdrawal of up to five percent of each investment amount every year as tax-deferred income. This five percent can be taken every year for 20 years, or built up over a number of years and withdrawn less frequently, without triggering a chargeable event for tax purposes.
A chargeable event occurs, for example, when you take out more than five percent a year, or you cash in your bond in full, or the last life assured dies, thus triggering an income tax charge.
Tax deferral is a feature of offshore bonds heavily marketed to expatriates, even when it is inappropriate or not relevant, therefore do not be over-sold on this feature until you have explored whether it is available to you, and of benefit to you.