5 Ways To Save Tax With Offshore Bonds

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Everyone wants their savings to work harder, and for British expats offshore bonds are a good way to squeeze every penny out of an investment.

Offshore bonds are effectively a portfolio of up to 100 insurance policies that hold savings in a tax-efficient wrapper.

The main advantage of saving into an offshore bond is ‘gross roll up’.

This allows investments to grow quicker by deferring any tax paid. This keeps expat savings intact for the life of the bond.

This deferred tax must be paid at some time, but some generous tax breaks offered to offshore bondholders by HM Revenue & Customs make sure bond investors can reduce the amount with some sensible tax planning.

Offshore bond tax breaks

Here are the top five tax breaks for offshore bond investors:

  • Flexible access with the 5% rule – unlike pensions, bond investors can draw down 5% of the cash in their fund every year without triggering tax, and that includes 5% of any top-ups as well. Unused drawdown allowances can be rolled up and carried forward to future years
  • Gifting wealth – If you give some cash away, you pay no tax and the person receiving the gift only pays at their marginal rate, which is great if you want to divest some wealth to a spouse or children who pay no tax
  • Time off for living overseas – Expats only pay tax on money withdrawn from an offshore bond for the time they have been a UK tax resident during the life of the bond 

The formula is: 

Amount assessable for tax = Bond gain in value x Days in UK divided by Days bond in force

  • Top slicing – The tax assessable amount is further reduced by top slicing. This splits the assessable amount over the number of years the bondholder has lived in the UK while the bond has been in force
  • Placing a bond in trust – The money in an offshore bond is outside of an estate for inheritance tax when placed in a trust. This makes the cash easily accessible to loved ones when the bondholder dies.

Offshore bonds can be tailored by independent financial advisers to meet an expat’s personal financial goals and estate planning objectives.