Offshore bonds (also known as international bonds) can be a tax-efficient product for global expatriates looking for a medium to long-term investment with a five-year term or longer.
In the current climate of uncertainty, it’s important to re-evaluate your portfolio, particularly when it comes to retirement savings and low-risk options that may balance out higher areas of exposure.
We’ve covered the Tax Advantages of Offshore Investment Bonds previously, here we’re focusing on the pros and cons and how to determine whether an offshore bond would be beneficial to your portfolio.
Offshore Bonds for Expatriate Investors
An offshore bond offers two routes to investment:
- Depositing a lump-sum
- Making regular investment deposits
The primary aim is to grow your wealth over time without paying immediate tax against investment gains in most scenarios, using that accumulated profit to save for the future. You can choose to withdraw your fund as a regular income, surrender the bond (in full or in part) or decide to leave it to a beneficiary.
Offshore bonds are viable investment options if you have used your full pension allowance, need a strategy to minimise estate inheritance tax exposure, want to gift wealth to your family, or require a tax-efficient savings approach.
An international bond works like an investment wrapper, and it can comprise mutual funds, ETF’s, stocks or shares in any combination. There are multiple investment options and you can switch investments at any time, although some may carry conditions.
Picking an Offshore Bond Structure
Depending on the nature of the offshore bond you select, you will normally have two different structures to pick from:
- Life assurance bonds are similar to an insurance policy, lasting for a whole life term.
- Capital redemption bonds operate more like an independent investment product. You may need to leave a minimum value in the bond to keep the fund open, but you can access your assets whenever you like.
The location of your bond will determine the options available. Many are hosted in tax-friendly locations such as Luxembourg, The isle of Man, Malta, Guernsey or the Cayman Islands, so it is important to review your residency and tax position to select an appropriate product.
Our advice is to ensure you receive independent guidance from an expat Wealth Management Professional before investing, particularly if you are overseas.
Why Invest in an Offshore Bond?
The principal of investment bonds is that they benefit gross roll-up, which means you gain a higher return as you are not subject to immediate capital gains.
Unless you bring the assets from your offshore bond (income or capital) to the UK, you wouldn’t usually be exposed to UK taxes as an overseas resident. This factor is important because you must always consider your citizenship or residency status before selecting any long-term investment product accounting for your plans and your current circumstances.
Bonds are issued offshore because it creates efficient tax planning, whilst protecting your retirement portfolio – but note that an offshore bond is not the same product as a conventional bond.
Traditional bonds provide a fixed-income return. You invest your money into a company or government entity, loaning the funds for a specific period at either a fixed or variable interest rate. This structure differs from an offshore bond because, in the latter, taxation is deferred due to zero or low tax levied against gains achieved by the underlying investments.
One aspect of an offshore bond means that when your profits are taken, they become taxable at the applicable rate in your country of residence – which may be minimal depending on your location.
The Pros and Cons of Offshore Bonds
Every investment product carries a level of risk, and Chase Buchanan endeavours to ensure our clients understand the benefits and drawbacks of any products they may choose to add to their portfolios.
In summary, the advantages of an offshore bond are that:
- Holders can defer tax until it is financially advantageous to access their fund.
- Profits can be treated as income tax rather than capital gains.
- Bonds can permit a capital withdrawal once per year (often around 5%), which can be used as part of an income portfolio.
The negatives are that some bonds also have a minimum investment threshold, typically between £50,000 so it may not be the most suitable product if you have a lower capital value to invest, particularly if the costs could outweigh the returns.
Expert Offshore Bond Investment Advice
Offshore bonds can be a practical way to boost retirement savings, grow your wealth and secure tax efficiencies in a low-risk environment. Choosing wisely, and ensuring you have complete oversight of the fee structure, remains key.
Tax deferral is an attractive feature but is only in your best interests when relevant to your plans. We always recommend a consultation with an independent expatriate investment adviser before committing.
Please contact Chase Buchanan at your convenience if you would like any further information about offshore bonds, whether this product is suitable for your portfolio, and to explore other possible investment opportunities.