Budget changes and the renewed case for offshore bonds
With tax rules tightening further in the Autumn Budget, investors must consider a wider range of strategies to help minimise tax drag and improve long-term outcomes
Frozen allowances, higher tax rates on capital gains, dividends from April 2026 and savings interest and rental income from April 2027 mean that tax-effective options for investors are narrowing. As this drag increases, many clients are beginning to review where their investments are held and whether a different structure could better support long-term objectives.
One option that is receiving renewed attention are investment bonds. Available to UK investors are both onshore bonds, which are held in the UK, or offshore bonds, which are held in other jurisdictions such as Ireland, Jersey and the Isle of Man.
While onshore bonds can be appropriate in some circumstances, offshore bonds are generally considered more suitable for higher earners who expect their tax rate to fall in the future, which is why the focus here is on offshore solutions.
Offshore bonds benefit from a unique tax treatment for people who have exhausted options such as ISA and pension limits, or who want to maintain greater flexibility than may be provided by pensions.
Here, we look at how an offshore bond works, when it might be appropriate and how rebuilding a portfolio inside the wrapper can potentially create a more efficient long-term planning strategy.
What is an offshore bond and how does it work?
An offshore bond is a regulated investment wrapper. It is often used for long-term investing where tax efficiency and flexibility are important. There are many benefits in using offshore bonds, but they also come with risks. In addition to the investment risk, offshore bonds can be complex, making professional advice important. As they are domiciled outside of the UK, they are also not covered by the Financial Services Compensation Scheme (FSCS).
The simplest way to illustrate how offshore bonds work is to go through to steps of investing into one and eventually withdrawing money later.
Step 1: You invest money into the bond
You place a lump sum, or sometimes a series of payments into the offshore bond. The money is then invested in one or more underlying funds, similar to a portfolio within an ISA or pension wrapper, investment company or a general investment account.
Step 2: The investments can grow inside the bond
Any income or gains made by the underlying investments are not taxed each year. This means returns can build up over time without income tax or capital gains tax being deducted.
Step 3: You can switch investments without triggering tax
You can move money between different funds within the bond to rebalance or change strategy. These fund switches do not create a tax charge, unlike holding the investments in a taxable account such as a general investment account. Like any investment, these can go down as well as up.
Step 4: You can take tax-deferred withdrawals each year using the ‘5% allowance’
Each year, you can withdraw up to 5% of the original amount invested without an immediate tax charge. For example, you could withdraw up to £12,500 each year from an initial investment of £250,000
There is not an immediate tax charge because it is considered a return of your original capital, rather than a withdrawal of investment returns. As a result, you can continue to use this rule until you have withdrawn the total value of your original investment (e.g. 5% of your original investment each year for 20 years).
This 5% allowance is cumulative, so if you do not use it in one year, it carries forward to future years. For example, after 10 years you could have withdrawn up to 50% of the original investment without triggering an immediate tax bill.
Step 5: Tax is only assessed when certain events occur
Tax is calculated when a chargeable event happens. Common examples of a chargeable event include:
Fully cashing in the bond
Taking withdrawals that exceed the available 5% cumulative allowance
When this happens, the total gain is assessed for income tax, not capital gains tax, regardless of how the investment returns have been generated.
Step 6: The tax rate depends on your circumstances at the time
The gain is taxed at your income tax rate when the chargeable event occurs, not when you originally invested. This means the tax rate may be lower if your income has reduced, for example, if you were to allow it to accumulate while you are working and then make withdrawals once you retire. This also means for planning you can time when you trigger the event to make best use of tax circumstances.
However, the tax treatment of this gain isn’t always straightforward. Bond holders can use what is known as ‘top slicing relief’ to potentially reduce their tax payable after a chargeable event has occurred, which is a valuable tax planning tool.
A point to note is that costs associated with an offshore bond can be higher than the equivalent investment within another wrapper. This should be taken into account when assessing the suitability of an offshore bond.
Top slicing relief
When a chargeable event happens, the entire gain is assessed for tax in that single tax year. This can result in a larger proportion of the gain being taxed at higher income tax rates than would have applied if the growth had been taxed year by year. Top slicing relief is designed to address this by reducing the overall tax liability in certain circumstances.
The optimal way to utilise top-slicing relief is to use it each tax year alongside other allowances, such as savings and dividend allowances. Taking a long-term view can mean paying a little tax now, to save a higher amount later.
How an offshore bond can help create a (potentially) tax-free retirement
Please note that the following is an illustration only, and tax treatment depends on individual circumstances and is subject to change.
Mark is 45 and plans to retire at 65. He earns £360,000 a year, which means his pension annual allowance is fully tapered to £10,000. He has £75,000 in his pension and £40,000 in his ISA.
Initially, Mark assumed that once he had used his pension and ISA allowances, his only remaining option was to invest additional savings into a taxable general investment account. He was concerned about the long-term impact of capital gains tax as his investments grew and also how he could gift to his children tax-effectively and reduce inheritance tax (IHT) in future.
After taking advice, Mark instead funds surplus capital to an offshore bond, allowing growth to roll up without annual income tax or capital gains tax while he remains a high earner.
Each year for 20 years, Mark invests:
£10,000 (gross) into his pension with a starting value of £75,000
£20,000 into an ISA with a starting value of £40,000
£10,000 into a GIA
£20,000 into an offshore bond
Assuming 5% net annual growth the value of Mark’s new investments at age 65 is:
Account | Estimated value at 65 |
Pension | £529,657 |
ISA | £767,451 |
General investment account | £330,660 |
Offshore bond | £661,319 |
Total | £2,289,087 |
Note that real returns may be higher or lower.
Drawing income in retirement
With this portfolio, Mark could take an income of over £80,000 without paying tax. He takes:
£16,760 from his pension, using his personal allowance and some of his tax-free pension commencement lump sum (PCLS)
£30,000 from his ISA, tax free
£10,000 from his GIA, crystallising gains within his annual capital gains tax allowance
£25,000 from his offshore bond, cashing in segments within the £5,000 starting rate for savings allowance, plus an additional the 5% cumulative withdrawal allowance
Source | Income | Tax paid |
Pension | £16,760 | £0 |
ISA | £30,000 | £0 |
GIA | £10,000 | £0 |
Offshore bond | £25,000 | £0 |
Total | £81,760 | £0 |
Over time, Mark continues to use the offshore bond withdrawal allowance. Once this is fully used, top slicing relief may apply, helping to limit tax on future withdrawals by spreading gains over the years the bond has been held.
Any income tax that is payable will also be at a lower rate than it would have been while he was working, and he can also gift some or all of the bond without creating a chargeable event.
If Mark has a complete national insurance contributions record, he will receive the full state pension of £12,547 per annum at age 67 and this would then use up his personal allowance.
Mark could then reduce his pension withdrawals to maintain a tax-free income or simply increase his income to over £90,000 with a relatively minor amount of tax to pay.
Offshore bonds: a renewed option for a comprehensive wealth strategy
Building assets inside an offshore bond allows clients to reduce the drag of annual taxation and take greater control over the timing and rate of future tax. As allowances continue to shrink and tax rates rise, the wrapper offers an effective way to preserve long term returns while maintaining flexibility over investment strategy.
Clients who hold large taxable portfolios, rebalance frequently or expect their circumstances to change over time may benefit from reviewing whether an offshore bond can form part of their long-term plan.
We help many clients consider how an offshore bond can fit within their overall strategy, taking into account they lifestyle needs, tax position and future plans. To discuss offshore bonds or any other aspect of your financial situation, speak to your usual Evelyn Partners contact or book an appointment.
