UK advisers are increasingly looking at offshore bonds ahead of upcoming tax rule changes.
David Little, partner in financial planning at wealth manager Evelyn Partners, said the firm’s advisers have also been increasingly looking at offshore bonds as a alternative strategy for tax planning.
“One strategy we have been talking to clients about more often since the most recent Budget is offshore bonds, as these can offer certain protection against some of the rising tax burden on savings and investments outside of tax wrappers,” he said. “Interest in offshore investment bonds is surging because the rising burden and complexity of tax is driving a search for more tax-efficiency.”
He said that changes to capital gains tax and inheritance tax have been a driving force behind the increased interest. “When CGT rates were 10% to 20%, the annual exemption was £12,300 pa, and the dividend allowance was £5,000, you could let wealth build up in a GIA as the CGT could be managed (especially for couples with both allowances). However, fast forward to this year and with dividend and CGT allowances now pretty much meaningless and tax rates hiked, a large GIA is now a tax headache,” he said.
“Where the complexity of setting up an offshore bond might previously have swayed many investors to stick with a general investment account, the feeling that investments have suffered a quite punishing tax crackdown is pushing many towards this more sophisticated solution.
“Further, as unspent pensions could soon be double-taxed under IHT reforms, they will increasingly be used for income, while wealth will be stored elsewhere, in ISAs and GIAs. But if you are not drawing down on a GIA you could be creating a future tax problem, with pregnant gains.
“So this has seen a surge of people “taking the hit”, paying CGT on the gains within the GIA and converting their investments to an offshore bond, as it offers more control over when tax is triggered, how much tax is paid, and even who is taxed.
“Their flexibility means you can start or pause tax‑efficient withdrawals, and for wealth transfer, segments of the offshore bond can be passed to children at some point in the future without a tax event occurring. Also, if you want to retire before age 57, as the minimum pension age will soon rise to from the current 55, they can provide access to funds that might otherwise have been locked away in a pension.”
Standard Life also said in December it expected trusts and onshore and offshore bonds to increase in popularity with advisers over the coming months following tax changes in recent Budgets.
At the end of last year, the business launched a new Flexible Reversionary Plan to help provide clients with estate planning flexibility, available on the firm’s International Bond. At the time, the business said it was part of “ongoing growth ambitions in the offshore bond market”.
Warren Bight, head of intermediary advised & private clients distribution at Standard Life, said: “Our research suggests advisers are re-evaluating the role that investing offshore may have in client portfolios moving forward.”
