Offshore bond taxation planning ideas

Offshore investment bonds are non-income producing assets subject to a tax regime which imposes an income tax charge when a 'chargeable event' occurs and a gain arises on that.

The same legislation determines the tax treatment of both offshore and UK bonds. The principles are examined in detail in the Taxation of UK Investment Bonds article.

In certain circumstances, special rules apply to offshore policies and these are examined in the Taxation of offshore policies article.

In addition, the articles Top slicing relief: the facts and Top slicing relief: planning ideas will be of interest.

The following tax planning matters are considered in our Tax Planning With UK Investment Bonds article:

• Change of ownership
  
  
• Large 'one-off' withdrawals
  
  
• 'Escaping' a large partial withdrawal gain
  
  
• Additional lives assured
  
  
• Personal pension contributions
  
  
• Preservation of personal allowances

These points are not duplicated here but it should be noted that the principles are also relevant to offshore bonds.

Regarding 'additional lives assured', an offshore capital redemption bond would be an alternative rather than a life assurance bond with additional lives. Contracts within such business are long-term insurance business but not life business. Under a capital redemption bond a premium is paid to an insurer for a specific return paid out later on the basis of an actuarial calculation. Prior to redemption the bond may be surrendered in whole or part in the same manner as a life assurance bond. Gains on capital redemption policies are taxed on individuals in a similar way to those on life policies.

The chargeable gain for an offshore bond is reduced for tax purposes if the person liable to tax was not UK resident throughout the policy period. This relief is extended to policies issued by UK insurers on or after 6 April 2013 and to existing policies issued by UK insurers which are modified on or after that date.

If the gain is made on/after 6 April 2013, then the gain is reduced using the following formula: A/B, where:

• A is the number of days that are foreign days in the material interest period. Foreign days are all the days in a tax year for which the individual is not UK resident and any days in a split year in which the individual is taxed as if not UK resident (the overseas part).

• B is the number of days in the material interest period.

Further details are contained here.

The implications of this are:

• If the number of foreign days in the material interest period equal the total number of days in that period, the chargeable gain will be nil.
  
  
• If the number of foreign days in the material interest period are nil, the whole gain will be chargeable.
  
  
• An individual proposing to return to the UK after a period of non-residence may decide to rely on the relief by waiting until UK residence resumed before encashing rather than encashing overseas, which could have adverse overseas tax consequences depending on the particular jurisdiction.

Where a gain under such a policy is reported on a chargeable event certificate, the full gain will be shown on the policy. If an apportionment for periods of non-residence is due, it is up to the person liable to calculate the apportioned gain and enter it on the tax return.

Where top-slicing relief is relevant in determining whether the individual is liable to higher or additional rate income tax, the number of complete policy years the policy has been held will be reduced any period of residence overseas. See IPTM3830.

This page applicable from 6 April 2013 makes it clear that time apportioned reductions will be calculated by reference to the residence history of the person liable to income tax on the gains. An exception to this rule is if a bond is assigned between spouses who are living together. In this scenario, the benefit of TAR can be claimed by the spouse who receives the assignment.

A time apportioned reduction can also apply to a chargeable event gain arising to the estate of a deceased individual. See also here that the material interest period is the part of the policy period during which the individual meets one of the following conditions:

• The individual beneficially owns the rights under the policy or contract.
  
  
• The rights are held on non-charitable trusts which the individual created
  
  
• The rights are held as security for the individual’s debt.

For the avoidance of doubt, note that Time Apportionment Relief is only relevant when the individual is UK resident for tax purposes at the time of encashment. If the individual is resident overseas when the bond is encashed, then the overseas tax regime will apply (this could be more penal than the equivalent UK charge).

Under the statutory residence test provisions, there is an anti-avoidance rule under which gains arising during a period of temporary non-residence will be treated as income arising in the year the individual returns to the UK. Time Apportionment Relief and top slicing relief will be available in this situation.

From 6 April 2025 the remittance basis regime ended and the new foreign income and gains (FIG) regime was introduced.

The new regime provides 100% relief on eligible FIG for new arrivals to the UK in their first four years of tax residence, provided they have not been UK tax resident in the 10 tax years immediately prior to their arrival (4-year FIG regime).

From 6 April 2025, all former remittance basis users who are not eligible for the 4-year FIG regime will pay tax at the same rate as other UK resident individuals on any newly arising FIG like any other taxpayer. The last year for which the remittance basis can be claimed is 2024/25.

After the initial period, all UK residents are taxable on their worldwide income and gains. Residence is determined using the statutory residence test. Years of residence before 6 April 2025 will also be taken into account.

Under the FIG regime, foreign income and gains are fully exempt from UK tax. Bear in mind however that the FIG regime lasts only four years. The categories of income and gains that qualify for the FIG regime are broadly similar to those under the old remittance basis.

The foreign income that will not be relievable under the 4-year FIG regime includes offshore life insurance policies and investment bonds subject to chargeable event gains whether the policy is a personal portfolio bond or not.