What is an Offshore Bond?
March 30, 2022
Written by admin

Firstly, what is an investment bond?

An investment bond provides a flexible method of investing your money, with the potential for growth over the medium to long term. It is designed to allow your capital to grow and give you the ability to take regular, tax-efficient withdrawals, if required.

An investment bond offers the opportunity to take advantage of several tax benefits, including arrangements which can help to reduce your inheritance tax liability.

Investment bonds are typically life insurance policies which allow individuals, companies and trusts to invest a lump sum into a variety of investments. You can also pay additional amounts into the investment bond if you wish to do so. Whilst the majority are technically life insurance policies, the level of life cover is minimal and they are mainly used as a vehicle to invest money.

Now more specifically, what is an Offshore Investment Bond?

An Offshore Bond is an investment bond established outside of the UK, typically in a country where there are no taxes on income or capital gains.


Control of Outcomes

Investment bonds have no maturity date, allowing customers to decide when to sell their investment. Although the bond will pay out on the death of the life assured, it is possible to have multiple lives assured meaning the bond will not end prematurely.


Convenience and Choice

The ability to choose from a wide variety of underlying investment funds, which can be changed with no tax or reporting considerations.


Administration Simplicity

All transactions are consolidated and reported in a single statement and valuation.


Tax Planning

The ability to time when tax is payable, especially if multiple lives assured are used.


Gross Roll-Up

Offshore bonds do not have income or capital gains tax deducted, other than withholding taxes, with investors benefitting from what is referred to as ‘gross roll-up’. As tax is not deducted within the bond, the benefit of compound interest/growth (gaining interest on your interest) is greater because more remains in your bond to gain interest and growth on.

What is the taxation of an Offshore Investment Bond?

For a UK individual, the personal taxation implications of an Offshore Investment Bonds is as follows:

Offshore bonds are issued by companies based in jurisdictions that impose no tax on the income and gains on the underlying funds, known as ‘gross roll-up’. Growth may not be entirely tax-free however, due to irrecoverable withholding tax, which may be deducted from interest and dividends received by the fund.

You may withdraw (including adviser fees) up to 5% of your initial investment (and any subsequent investments) each year without any immediate tax payable. This allowance is cumulative and any unused allowance is carried forward to future years. There is no immediate tax liability until 100% of the initial and any subsequent investment has been utilised. For example, if you were to take automatic withdrawals of 5% per year, you could do this for 20 years with no immediate income tax liability.

If you withdraw (including adviser fees) more than 5% a year, or more than you have invested, you may be liable to income tax on any amount above 5%.

When you cash in your bond, you may have to pay income tax on any gain that you have made, taking into account any withdrawals (including adviser charges).

On the death of the life assured (or the death of the last life assured if multiple lives assured), your bond is treated for tax purposes as though you had fully cashed it in just before their death.

When an offshore bond is surrendered, an individual can be charged income tax on the gain made by the bond at the nil rate (is within the Personal Allowance and starting rate for savings), basic rate tax of 20%, higher rate tax of 40% or additional rate tax of 45%. Top slicing relief is available if the gain pushes you into the higher rate or additional rate tax brackets (see section below).

Tax of Investment Bonds held under trust is a complex area and therefore, we strongly recommend that you seek financial advice before making any decisions regarding trusts.

What is top-slicing relief?

Top slicing can be applied where the whole gain pushes a taxpayer into a higher rate of tax than they would have otherwise paid, were it not for the inclusion of the gain from the bond in that year.

When you cash in the whole, or part, of your bond, you may realise a gain in that single tax year. However, that gain would have been generated over the life of the bond, not that one single year. Therefore, you are able to divide the gain by the number of complete policy years to calculate the slice.

If, after adding the slice to the taxpayer’s other income, they remain in the basic rate tax band for example, they would pay tax at 20% on the whole gain, rather than potentially 40% tax on a large proportion of the gain. If after adding the slice to the taxpayer’s other income, the gain falls across two tax brackets, you calculate the tax for that individual slice and multiply the amount of tax by the number of complete policy years.

This is a very complex area of taxation and we highly recommend that you seek advice. The summary provided here is only a basic summary and depending on your circumstances, there can be various other reliefs that can apply.

Who could an Offshore Bond be suitable for?


An individual who is using an offshore bond as part of inheritance tax planning.


An individual who wishes to top up their pension arrangements but have used their entire pension annual allowance.


An individual looking to take regular tax-efficient withdrawals from their investment, such as a retiree.

Who would an Offshore Bond typically not be suitable for?


An individual who has no other savings or investments.


An individual who has not used their other available tax allowances, such as an ISA.


An individual who would need access to your capital in the short-term.


An individual who is not willing and able to accept the risk of potential investment losses.

Tax treatment varies according to individual circumstances and is subject to change.

Tax planning, Inheritance Tax planning & Trusts are not regulated by the Financial Conduct Authority.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.


Download your FREE guide on 'borrowing to buy your new home' here!

Whether you’re looking to buy your very first home or are a seasoned mover, we’re confident you’ll find this guide valuable. Subscribe for regular tips from our team and get instant access to our FREE guide on borrowing to buy your new home. We respect your privacy and promise not to spam you, unsubscribe at any time. View our Privacy Policy here.

You have successfully subscribed! Please check your inbox for your FREE download!