Offshore investment bonds: The alternative to ISAs

Those moving away from Britain can often find the search for an appropriate investment opportunity daunting. Expat investment options vary significantly, from more traditional options available to those who are still UK residents to alternatives that are specifically designed for international investors. Expats can choose between onshore and offshore investments, both of which can take many different forms, but offshore investment options are often considered preferable for individuals who have relocated overseas.

We have taken a closer look at offshore investment bonds to help you gain an insight into how and why this investment alternative could be the right option for you.

What are offshore investment bonds?

An offshore investment bond is a type of ‘tax wrapper’ that can provide British expats with tax benefits on any investments made within that bond. These benefits include additional control over how much tax you pay, when you pay it and who the tax is paid to.

Traditionally, offshore investment bonds are set up by life insurance companies and are based in an area offshore from mainland Britain and with a favourable tax system, such as the Isle of Man or Guernsey. As a result, growth is largely free of tax and your returns will be greater as a result. In addition, while the investment remains in the offshore bond, it will not be subject to UK taxes.

Offshore investment bonds can be written either on a life assurance or capital redemption basis. The former will bring the policy to an end upon the death of the life assured. The bond can be surrendered earlier, but may be subject to an early surrender fee.

If the policy is written on a capital redemption basis it has a fixed term and a guaranteed value, which is usually twice the sum originally invested. This basis can also be surrendered early, but is also often subject to an early surrender fee.

How do they compare to ISAs?

ISAs are considered by many UK residents to be a relatively safe and tax-efficient investment option. As such, many lean towards such opportunities when considering the future of their money. Sadly, non-residents of the UK and expats living outside of the country are rarely offered the opportunity to invest in ISAs, which are reserved for national investors. Non-residents are also no longer entitled to invest in current ISAs, which often means it is more tax-efficient to relocate your money than to allow it to remain in a static account.

This is where offshore expat investment bonds come in. By providing a border-free alternative to ISAs, offshore investment bonds allow expats to continue investing money without fear of facing the same restrictions following any future relocations. In fact, by investing money overseas, expats can have multiple homes in multiple countries without risking the security of these investments.

Offshore investment bonds offer various options for investment, such as stocks and shares, mutual funds and many other financial products. Subsequently, they can be personalised to match the individual investor, so if you want to pursue higher or lower risk investments you can do so. However, some investors opt for a collective offshore bond instead, where the investment options are limited to products that have been approved by the bond provider and may offer lower risk.

Ultimately, it’s important to choose your bond with care, as each investment will play a vital role in its success or failure when it comes to meeting your financial expectations. The broad range of investment available through an offshore investment bond means you have the flexibility to choose each and every investment yourself, but remember that this flexibility can come with an additional charge from the company managing your bond, as well as the potential for high .

Benefits of offshore investment bonds

Offshore investment bonds offer numerous benefits to UK expats who wish to invest their money away from the British mainland. These benefits include:

  • Tax-efficient investing: The main draw to offshore investing for many expats is the tax benefits. By investing offshore in a low or zero tax jurisdiction, you can enjoy the expertise of specialists who will help you significantly reduce your tax liability, regardless of your current or previous country of residence
  • Risk management: Offshore investment bonds make it easy to diversify your portfolio, so you can minimise your risk and avoid limiting yourself to a single country or type of investment. You can simply choose the individual investments that you feel work best for you
  • Ease of currency management: Offshore products are often focused on the international or expat investment market. As such, they often provide access to services such as multi-currency accounts, which make international relocation significantly easier
  • Ease of tax reporting: Offshore investment bonds are not considered to be income-producing assets, so they do not need to be included in self-assessment tax returns. This can save significant time when it comes to submitting your annual tax return
  • Gross roll up: Investments within offshore expat investment bonds can be changed without any need for tax reporting, so you can adjust risk as and when you wish to
  • Top slicing: Top slicing relief is available to any lower rate taxpayers who will become a higher rate taxpayer once they have received bond proceeds. This benefit reduces or removes higher rate liability, increasing return for the holder.

Charges associated with offshore investment bonds

As with all investments, offshore bonds can also come with their disadvantages. The main issue many British expats face when contemplating such investments are the hidden – and confusing – charges and fees. Before choosing your bond provider, take the time to understand the costs you will face as part of the service. These typically include:

  • Establishment charges
  • Account management charges
  • Administration charges
  • Dealing charges (for making portfolio changes)
  • Currency management charges
  • Withdrawal charges (usually only applied for early withdrawals)
  • General service charges
  • Annual management charges

Should I invest in an offshore investment bond?

Offshore expat investment bonds can provide significant advantages for British expats seeking to invest in medium or long-term products, particularly those who want to have as much control and flexibility as possible. However, they are not right for everyone and the costs involved can make them unsuitable for certain investors. This is particularly the case where the bonds that are recommended to an investor are too expensive, restrictive or flexible for the individual in question.

ExpatRoute works hard to deliver detailed and up-to-date information on the investment options available to British expats. However, we know that understanding all the options available can be complex. If you would like more personalised advice on your finance options, it is important to seek independent advice from a financial adviser, who will be able to help guide you based on your current circumstances.

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