Planning for life beyond the UK: where offshore bonds can fit

More entrepreneurs and senior professionals are building lives that stretch beyond UK borders. For some the move is driven by business interests, while for others, it’s career progression, sport, family or lifestyle. Whatever the reason, international mobility is increasingly common.

As with any major life change, good wealth management centres around anticipating these moves and how they could impact the future, rather than simply waiting to react to them. 

One area that often enters the conversation for internationally mobile clients is the offshore bond. They’re not suitable for everyone, but for the right individual, they can provide a surprising level of control in a complex financial situation.

Many of the people we advise face familiar issues. They are higher or additional rate taxpayers, are already making pension contributions within their available allowances and utilise their ISAs in full each year. Yet they continue to accumulate capital, whether through business profits, bonuses or investment growth.

At that point, the options on how to invest further capital move beyond the obvious, but it’s here that offshore bonds offer one potential solution. 

The fundamentals of an offshore bond are that it allows for indefinite deferral of tax, with the ability to realise gains and earnings at a time of your choosing. Tax is generally triggered when there is a chargeable event such as a full or partial surrender of the bond.
That ability to be in charge of the point of taxation offers substantial flexibility and control. It means gains can potentially be realised:

• In retirement when income is lower
• In a year where other taxable income is reduced
• During a period of non-UK residency and living in a lower tax jurisdiction
• After assigning segments to a lower rate taxpayer

The aim is not to avoid tax altogether (though this can be one potential outcome), but to move the liability to a more favourable moment in time. They offer interesting planning opportunities for those who remain in the UK, but for internationally mobile clients the options widen considerably.

An increasing number of business owners and professionals are unsure whether their long-term future lies in the UK. Some are expanding into new markets, others are taking multiyear roles overseas, and some intend to return to a country of origin later in life.

The tax position of offshore bonds is such that if an individual becomes non-UK resident for five complete UK tax years and surrenders an offshore bond during that period, there is no UK tax charge on the gain.
That does not mean anyone should move purely for tax reasons. But if a move is already likely, understanding the financial implications is critical.

For example, a business owner planning to sell while non-resident may already be modelling capital gains outcomes. If they also hold an offshore bond, the same period of non-residency could affect the tax treatment of their investment portfolio.

Planning early allows you to quantify the value of that decision rather than discovering it after the fact.

All non-residents aren’t created equal, falling under the tax rules of whichever country they now call home. Different jurisdictions apply very different approaches to foreign income and investment structures, and so the tax treatment of an offshore bond in one country may be very different in another.

In Australia, for instance, holding an offshore bond for over 10 years with no withdrawals can potentially mean completely tax-free withdrawals. In France, certain bonds can be converted into an Assurance Vie structure, which carries specific French income tax and estate planning advantages. 

However, there are many places around the world where the tax treatment could be less favourable than simply paying tax in the UK. The details can be complex but very important, so planning must be jurisdiction specific and based on current legislation.

Not everyone who considers moving abroad ultimately does so. Family, health and business ties can all influence decisions and plans often change.

If non-residency never materialises, an offshore bond can still be managed efficiently.

Options may include:

• Using the cumulative 5% allowances to access capital gradually without an immediate tax charge
• Fully surrendering in retirement when taxable income is lower
• Assigning bond segments to adult children or grandchildren, potentially shifting the tax liability to a lower rate taxpayer
• Using top slicing relief to mitigate the impact of a large gain in a single tax year

It is important to be clear that gains realised in the UK are subject to income tax rather than capital gains tax (CGT). Income tax rates are typically higher, and so any decision to use a bond should be made with a clear understanding of the eventual exit strategy.

In short, non-residency can be highly beneficial, but it is not the only planning route for tax efficient withdrawal.

Offshore bonds are a specialist tool that can be effective in the right circumstances, rather than a universal solution.

They may be relevant if you:

• Are a high earner with capital beyond pensions and ISAs
• Expect to spend meaningful time overseas
• May sell a business while non-resident
• Have a globally mobile career
• Want greater flexibility over when tax is triggered

For internationally mobile individuals, timing can significantly affect outcomes, and the earlier that conversation takes place, the more options remain available.

To discuss your options around offshore bonds or any other aspect of your financial situation, speak to your usual Evelyn Partners contact or book an appointment with our specialist International Financial Planning team.