Investing in bonds

Saving for retirement, organising our finances to escape inheritance tax and making the most of our hard-earned cash are at the top of the list of many expatriates and offshore investors. Investment International looks at how you can benefit from offshore bonds.

Offshore bonds are usually offered by the subsidiaries of UK Life Companies and are typically run from Luxembourg, Isla of Man and the Channel Islands, with the main advantage being that they grow free of UK tax.

Theoretically, anyone can invest in offshore bonds and tend to be far more flexible that a qualifying pension product, for example you can have access to the funds before the age of 55.

Offshore bonds can be very useful for people who are wealthy and have already exhausted other tax-efficient savings vehicles, such as pensions and individual savings accounts.

They can work well for flexible retirement saving as your money grows, essentially, tax-free. Tax deferment is the key benefit for investors in offshore bonds and potential investors therefore need to take a view on what their tax position is likely to be when they eventually want to cash in their investment.

Ideally, you would want to be in a position where you don’t pay any UK income tax at all.

The greatest benefit of an offshore bond is the ability to roll up investment growth within it free of income or capital gains tax (CGT), which is also known as ‘gross roll up’.

Basically, this compares with onshore investments which are automatically taxed at 20 per cent a year, and higher-rate taxpayers must pay the extra 20 per cent via their self-assessment forms to make this up to 40 per cent.
Bob Golding, international planning manager at Clerical Medical believes that offshore bonds can outperform onshore on long-term investments of £250,000 or more, due to the compounding effect of gross roll up. However, he said it was necessary for clients to have a bond for at least 20 years to benefit from this.

Redemption bonds
Offshore bonds can be set up on a Lives Assured basis, similar to Onshore Investment Bonds, or on a Redemption Bond basis.

Redemption Bonds are not Life Assurance contracts, they are policies of assurance that have a term and a minimum maturity value at the end of that term. They have a term of 99 years and do not end on death of the Policyholder, which means that they are excellent vehicles for holding monies or Trust for beneficiaries.