New offshore horizons

Finding the right offshore investments can be a key factor in making the most of your wealth, and it’s not only for the wealthiest of investors. With a few well-advised decisions you could broaden your investment portfolio.

Offshore bonds provide an opportunity for your assets to grow in a tax-free environment. They also allow you to choose when any tax liability becomes payable. There are a number of other tax benefits with offshore bonds, especially if you have spent time living abroad. But they are complex structures that require professional financial advice.

While many investors will be aware that investing in an Individual Savings Account (ISA) or pension can help reduce their tax bill, you may be less familiar with offshore bonds. Like pensions and ISAs, offshore bonds are effectively ‘wrappers’ into which you place your investments, for example, funds or cash. They are offered by life insurance companies which operate from international finance centres.

The main tax benefit of investing in an offshore bond is gross roll-up. This means that any underlying investment gains are not subject to tax at source – apart from an element of withholding tax. With an onshore bond, life fund tax is payable on income or gains made by the underlying investment. This means your offshore investment has the potential to grow faster than one in a taxed fund.

As long as investments are held within the offshore bond wrapper, you don’t pay any income tax or capital gains tax on them and you can switch between different funds tax-free. While you do have to pay tax on any gains when you withdraw assets, there are a number of ways you can potentially reduce the amount you pay.

You can withdraw up to 5 per cent of your initial investment every year for 20 years, and defer paying tax until a later date. If you are a higher-rate taxpayer now but expect to become a basic-rate taxpayer when you retire, you can defer cashing in your assets until retirement and possibly pay half the tax due on any gain realised.
You can assign (transfer ownership) an offshore bond – or parts of it – as a gift without the recipient incurring any income or capital gains tax, although this may cause an Inheritance Tax (IHT) liability if you were to die within seven years. All future tax on withdrawals will be charged at the new owner’s tax rate, if any. This can be a tax-efficient way to help fund your children’s university fees, for example, since your children are likely to be low or non-earners as students.

Putting an offshore bond in a trust could help your family reduce or avoid IHT, provided you live for seven years after setting it up.

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested.