Article

High earner? An offshore bond could protect against Capital Gains Tax

5 min read 27 Nov 24

Staying ahead of the tax curve

If you’re affected by the recent hike in Capital Gains Tax, you’re probably wondering how you can soften the impact. An offshore bond could be the lifeline you’re looking for. Many are quick to dismiss them as complex. But in reality they can be a practical way to manage your money – especially if you’re a high earner or have a high net worth. This is because they have appealing features that could play into your hands when it comes to Capital Gains Tax. They won’t be right for everyone, but that’s true of most things in the world of investing. So why should you sit up and take notice? In this article, we'll discuss what an offshore bond is, as well as key things to consider.

Remember, investing involves risk, so your money can go down as well as up in value. This means you could get back less than you paid in. Tax rules can change, and its impact along with any tax relief depends on your circumstances, including where you live.

Capital Gains Tax – a quick recap

Capital Gains Tax is what you’ll pay on any profit you make when selling something you own (like individual stocks and shares, or property). Everyone’s got a £3,000 allowance, but anything you make above that is liable.

What you pay depends on whether you’re a basic or higher rate tax payer. If you’re a basic rate tax payer, this has risen to 18%. And if you’re a higher rate tax payer, it’s now 24%. Only a very small percentage of people ever have to pay Capital Gains Tax, so for the vast majority it’s not something they need to consider. But for those that do, looking at tax-efficient ways to manage your money can pay off.

A smarter way to combat tax

So where do offshore bonds fit into the equation? And what exactly are they? Simply put, an offshore bond is a ‘tax wrapper’ – just like a pension or ISA – where you can invest in various assets, either as a lump sum or regular payments. This might include stocks and shares, cash or property. They're a tax-efficient way to save for the medium to long term, usually five years or more.

Here’s the important part – for UK tax purposes, they’re considered out of scope. This means as long as your money remains invested, any returns you make won’t be subject to Capital Gains Tax. Over time this can have a cumulative effect, giving your money breathing space to grow without being eroded by tax. Although just like any other investment, its value can go down as well as up, and you may get back less than you paid in. You’ll only have to pay tax when you withdraw your money.

Unlike pensions and ISAs, there’s no limit on the amount you can pay in each tax year. So if you’re fortunate enough to regularly max out your allowances elsewhere, an offshore bond could be a logical next step. Minimum deposit amounts and charges are usually higher. But this can be offset by the tax advantages, as well as other perks. Let’s cover some other key points in more detail.

Other tax benefits

Take money out, pay tax later
Each year you can withdraw up to 5% of the original amount you invested tax free. If you don't use your allowance, it rolls over to the next year. So you could withdraw 10% in year two, 15% in year three, and so on. You can do this for up to 20 years, meaning you could withdraw 100% of your initial investment in year 20 without triggering a tax charge.

Protect against Inheritance Tax
An offshore bond can be placed into a trust which is an effective way of minimising Inheritance Tax. Providing certain conditions are met, anything held within a trust falls out with your estate, meaning Inheritance Tax won’t apply. Many offshore bonds can also be gifted to loved ones in segments. Live for seven years after making a gift and it won’t be subject to Inheritance Tax at all.

Strategic tax planning
If properly planned, you can be smart around how much tax you pay when withdrawing more than your 5% allowance. For example, if you’re a higher rate tax payer now, but expect to be a basic rate tax payer in the future (perhaps in retirement) – then you can postpone taking your money until then. Doing so may allow you to benefit from paying less tax. Remember, higher rate tax payers pay 24% Capital Gains Tax, while basic rate payers pay 18%.

There are some drawbacks to be aware of too. Not least, are ‘chargeable events’ – the term given to circumstances which result in a tax charge. An example would be withdrawing more than your 5% tax-free allowance. Depending on your personal circumstances, you could have to pay up to 50% tax on the excess you’ve taken. There are other scenarios that hold the potential to land you with a tax bill, so it’s important to understand the risks. Financial advice can help.

Case study – how an offshore bond could be used tax-efficiently for your future

Scenario

James and Natasha are high earners, and parents to Cara (nine) and George (seven). They’ve recently received a hefty inheritance of £450,000, and have agreed they’d like to invest the money for their children’s future. They discussed this with their financial adviser, who’s recommended against investing the amount into a pension. This is because they wouldn’t be able to access the money until pension age – many years down the line. It would also take substantial time to drip feed the money into Junior ISAs, considering they can only invest £20,000 each tax year as per current allowances.

Solution

Instead, James and Natasha’s financial adviser has recommend an offshore bond. By investing the money in this way, James and Natasha can maintain control, perhaps using their 5% tax-free annual withdrawal allowance to fund the children’s higher education. The remaining money will continue to benefit from tax deferral, giving it better chance to grow. When Cara and George are older, they can be gifted the money (perhaps in segments depending on when and how they need it).

Importantly, as Cara and George will still be relatively young when enchasing the offshore bond, they’re more likely to be basic rate tax payers. This means a lower tax bill compared to if James and Natasha withdrew the money as higher rate tax payers. Investing the money in an offshore bond also allows James and Natasha to maximise their own pension and ISA allowances for retirement.

This isn't a real life example or a recommendation. If you’re a high earner or have a high net worth, we recommend seeking financial advice to see how an offshore bond could help given your own circumstances.

Interested in improving your tax position?

An offshore bond is a great way to open up new horizons with your money. But there’s a lot to think about, and what we’ve covered in this article is just the tip of the iceberg. Understanding how everything applies to you can be difficult, so it can pay to seek financial advice. And we’re here to help.

Our experts can recommend whether or not an offshore bond is right for you, and how it could work alongside other savings and investments you have. Tax can be complicated at the best of times, so we’ll break things down simply. Getting everything right could spell the difference between a higher or lower tax bill.

Keen to find out more? Book a no-obligation chat today.

The advice recommendations we make are from a carefully selected range of products and funds. Using a focused and controlled approach allows us to develop an in-depth knowledge of the products, so we can safely and confidently recommend a solution that’s right for you. This is known as restricted advice.