Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Wealthy British investors seeking to lower their tax bills have pushed up offshore bond sales over the past year, amid a fiscal crackdown by chancellor Rachel Reeves.
New investment into offshore bonds in the 12 months to the end of June hit a record £10.5bn across all providers, according to data seen by the Financial Times, a sharp increase from £5.1bn the previous year.
The largest providers of offshore bonds include the international divisions of Canada Life, Standard Life, Utmost and St James’s Place, with Ireland as a popular jurisdiction, but some also writing business from the Isle of Man and Luxembourg.
“Recent UK tax reforms have contributed to a growing interest in international bond products,” said Sean Christian, chief executive of Canada Life International, which had record flows in the first half of this year.
He added that changes such as the abolition of UK resident non-domicile status, higher capital gains tax and the inclusion of pensions within inherited estates from 2027 were prompting people to seek “estate planning flexibility combined with tax efficiency”.
An offshore bond is an investment wrapper, legally structured as a life insurance policy and issued by an entity based outside the UK, which enables individuals to invest in a range of assets and roll up income and gains without immediately paying tax.
This allows for tax deferral as you only pay tax when you take money out of the bond. You can withdraw up to 5 per cent of the original investment each year for up to 20 years without paying tax, as those withdrawals are treated as a return of capital.
All other money taken out of the bond is subject to income tax at your marginal rate, making the products particularly attractive to people who want to access the proceeds in retirement, when they think they might fall into a lower tax band.
Experts said the increase in the capital gains higher and additional tax rate from 20 to 24 per cent announced at the last Budget, as well as the collapse in the tax-free allowance from £12,300 to £3,000 over the past two tax years had prompted more people to look for offshore bonds.
“The changes in CGT have made it more favourable for many investors to be in a life insurance bond rather than holding the assets directly,” said Simon Willoughby, managing director at Acuity Corporate Consulting.
He added that the abolition of the UK resident non-dom tax regime in April 2025 had also forced “a bit of a closing down sale with unwrapped assets”, as people sought to defer future tax charges, with some proceeds invested into offshore bonds.
The former non-dom regime allowed UK tax residents whose permanent home or “domicile” was overseas to avoid paying British tax on their foreign income or capital gains for 15 years.
It was replaced by a new four-year residence-based scheme. New arrivals to the UK will get 100 per cent relief on foreign income and capital gains for their first four years of tax residence, provided they have not been a UK tax resident in any of the 10 consecutive years before their arrival.
The search for tax-efficient investments comes against the background of an Isa allowance that has remained at £20,000 since 2017.
Pensions, which had been used by some for estate planning, will fall within scope of inheritance tax from 2027. While the lifetime allowance tax charge on pensions was abolished in 2024, the total amount that normally can be withdrawn from a pension as a tax-free lump sum is £268,275 — down from £312,500 10 years ago.
“Now more wealth sits outside pensions and Isas, people are seeking a third wrapper into which to save and be tax efficient,” said Jessica Cook, partner at financial advisory firm AES International.
She added that since the government announced plans to bring pensions within inherited estates, where the intention was to leave it as a legacy for children, “a lot of people will put an offshore bond into a trust structure . . . they are almost made for that”.
The inheritance tax treatment of trusts depends on the type of trust and how it is set up, but they are typically subject to a lower rate of inheritance tax on assets entering and exiting the trust, with a periodic charge every decade.
Warren Bright, head of retail intermediary and private client distribution at Standard Life, said: “[With] significant IHT changes anticipated in coming years, the opportunities to further protect clients and provide tax efficient returns has put offshore investing front and centre with advisers and their UK clients.”
Credit: Source link
