The important role onshore and offshore bonds can play in a financial plan | First Wealth (2024)

If you want to be able to enjoy a comfortable and sustainable lifestyle in retirement, having a thorough financial plan can be hugely beneficial. Of course, when building one, it’s important to be able to make informed decisions with your money.

One useful vehicle for growing your wealth is an investment bond, which typically comes in two varieties: “onshore” and “offshore”. While this might initially sound confusing, it isn’t as complicated as you may think.

Both onshore and offshore bonds can play a useful role in your financial plan, so read on to find out what they are and how they can benefit you.

Onshore bonds are subject to UK Corporation Tax, while offshore ones are typically not

Investment bonds are usually classed as a “life insurance” policy, though a better way to think of them is as an investment product. Essentially, they act as a tax wrapper for your investments, enabling you to pay money in and take it out when you like.

When you buy this bond, your provider invests your premium on your behalf and the returns build up until you make a withdrawal. Typically, they have a minimum investment term and may charge you if you want to cash in early.

Many of these bonds also have a minimum investment amount, which is usually between £5,000 and £10,000. Of course, this often varies between providers.

There are two types of investment bond, though the main difference is how they are taxed. These are:

Onshore bonds

To explain it simply, “onshore” bonds are typically registered in the UK, and any growth on the fund is subject to Corporation Tax. They are often given special tax treatment, which many other investments don’t get, and so can provide valuable planning opportunities. For example, the funds underlying the bond are subject to “UK life fund taxation”, which essentially means that you’re treated as having paid the basic rate of Income Tax on your gains.

Offshore bonds

Offshore bonds are usually registered outside of the UK or a location within the UK that has favourable tax treatment, such as the Channel Islands. In many ways, they are very similar to onshore bonds, but have one key difference.

While onshore bonds typically require you to pay tax on any gains you make from the underlying investments, this isn’t always the case with offshore bonds. Due to this advantage, they can sometimes grow faster than their onshore counterparts, although this isn’t guaranteed and there can be other factors, like charges, to take into account.

On surrender, gains made under both onshore and offshore bonds are classed as savings income.

Benefit from top-slicing tax on surrender

Top slicing is a unique tax treatment, that specifically relates to gains made on investment bonds. Top-slicing relief allows any chargeable gains to be divided by the number of complete years you have held the bond. When a bond accrues gains, top-slicing allows you to spread the tax charge over the whole period that you held the bond, and not just the tax year when you realised the gain.

When you surrender a bond, the number of complete relevant years is always back to the start of the bond.

With careful planning, top-slicing relief can be used to reduce or eliminate the liability to higher and/or additional rate income tax when a chargeable gain arises.

Each tax year, you can withdraw up to 5% of the original investment from the bond

Along with the significant advantage of top-slicing, you can typically make withdrawals of up to 5% of the original investment each tax year (6 April to 5 April), without having to pay any immediate charges.

Since this is treated as a simple return of capital, any tax you may have to pay is deferred. This means that you will usually only be liable for it when the bond matures.

If you pay the higher or additional rate of tax, this benefit can be extremely valuable, as you can delay the payment until your circ*mstances change. For example, since you may fall into a lower tax bracket after you retire, if the bond matures after this point, you could save a significant amount of money.

Balance the pros and cons

However, it’s important to note that there can also be some drawbacks to using investment bonds, such as their inflexibility.

As we mentioned earlier, there are often minimum investment amounts and periods, as well as charges if you want to make an early withdrawal. This can pose a problem if you need to access this wealth at short notice.

On top of this, investment bonds may offer you a much smaller selection of funds to invest in, which can make it more difficult to find the one that’s right for your needs.

Finally, they can also have high charges, this is especially true for many offshore bonds, which will reduce your returns in the long term.

Working with a planner can help you to decide if investment bonds are right for you

When growing your wealth, investment bonds can play an important role in your long-term financial plans, but it’s important to be able to make an informed decision about when and how to use them.

For example, they can be highly beneficial if you don’t need immediate access to the wealth they contain, such as when you’re putting money aside for retirement planning. This can make them useful for medium- and long-term planning.

However, since they lack the flexibility of other investment options, they may not be right for your needs. They can also have other drawbacks, such as how they don’t benefit from the same tax efficient status as pensions or Individual Savings Accounts (ISAs).

If you want to know whether investment bonds could play a useful role in your financial planning strategy, get in touch. We’ll help by taking a holistic approach when assessing your situation, lifestyle goals, and aspirations, and building a long-term plan that’s right for your needs.

Get in touch

If you want to know whether an investment bond might be right for you, we can help. Email hello@firstwealth.co.uk or call 020 7467 2700.

Please note:

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circ*mstances.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.