If you regularly exhaust the standard pension annual allowance of £40,000 per year (this is reduced if your adjusted annual earnings are above £240,000) and your £20,000 annual ISA allowance then offshore bonds can be a useful, and tax-efficient, investment tool. Offshore bonds may provide a more tax-favourable solution compared to general investment accounts.
What is an offshore bond?
Offshore bonds, or international bonds, are tax-efficient investment vehicles. You can typically invest in a wide range of funds covering assets including equities, property, and fixed-interest securities. Investments are held in tax-efficient jurisdictions outside of the UK.
Income and capital gains tax efficiencies
Investments within an offshore bond are not subject to annual capital gains tax or income tax, so gains can ‘roll up’ without any immediate tax charges applying. You only pay income tax on the chargeable gain when you encash the bond. Higher and additional rate taxpayers can make significant tax savings if they expect to be a basic rate taxpayer when they encash the bond – see table below.
Deferred tax
You can withdraw up to 5% per annum of the original investment amount each year and see tax deferred on this sum. This 5% allowance also accumulates, eg. after two years, you can draw 10% of the original investment with tax deferred on this amount. Withdrawals above 5% may attract income tax.
Mitigating inheritance tax
Many offshore investment bonds consist of segments that can be gifted/assigned to designated beneficiaries in a tax-efficient manner. You can assign segments of the bond to beneficiaries without incurring any immediate tax liability. If you survive for seven years it is considered outside of the estate, and is not subject to inheritance tax (IHT).
Lumin provides a range of integrated investment management and financial planning solutions for high-net-worth individuals. To find out more, call 03300 564 446, or book a free introductory meeting by visiting luminwealth.co.uk/contact.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
