Heading offshore could be a sound investment

The most common form is investment bonds offered by offshore branches of British life assurance companies via a taxefficient wrapper. Growth or income generated within the bond is not liable to UK income or capital gains tax as it would be if invested in the UK. This gives rise to the concept of “gross roll-up” where the investment grows free of tax, greatly enhancing the ultimate outcome. Tax is only payable when the investment bond is encashed in the UK.

Offshore bonds can be very useful for investors who have already exhausted other tax-efficient savings schemes, such as pension and individual savings account allowances.

So who else could benefit from offshore investing? Almost anyone who currently pays higher rate income tax but who is likely to be paying at a lower rate in the future.

The classic scenario is a higher rate taxpayer saving for retirement at which point they know they will become a basic rate taxpayer.

Rather than pay higher rate tax now on the investment, it grows with gross roll-up, free of tax, and can be cashed in with only basic rate tax to pay.

This can be even more beneficial if the investor plans to retire abroad. The bond can be encashed free of UK tax as well as benefiting from the taxfree growth. Certain countries, such as Cyprus, will not even levy tax on the investment if you cash it in while resident there. The whole investment is basically tax free.

Offshore bonds can also be an excellent way of investing a lump sum to pay for a child’s university education. The grandparents would take out the bond and then assign all or part to the child when it is needed. Most students are non-taxpayers, so there would be no tax to pay on encashment.

A UK citizen who is currently working full-time abroad but who intends to return to Britain can also take advantage. Growth accrued in the offshore bond during the period of residence overseas is not liable to UK income tax on encashment.

Finally offshore bonds can mitigate against inheritance tax. By placing the bond in trust, it’s possible to remove money from your estate, enabling you to pass it on the next generation without incurring any IHT. So, why isn’t everyone doing it? The charges are usually higher than for an equivalent onshore investment. On average, an offshore investment bond would need to be held for around nine years before the benefits of gross roll-up outweigh the costs.

And offshore bonds must be encashed at the right time and in the right way to utilise the tax advantages properly. This can lead to quite complex arrangements and reduce flexible access.

Overall, it is vital to obtain specialist advice to get the most out of offshore investing. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice

Offshore bonds can be useful for investors who have exhausted other tax-efficient savings