5 important issues to consider if you’re thinking of investing in an offshore bond


In last month’s newsletter, you read an article explaining why investment bonds could play an important role in your future financial and income planning strategy.

In that article, you read about both onshore and offshore investment bond options.

As many of our clients are based overseas, I thought it would be a good idea to consider offshore bonds for you, with specific reference to some of the disadvantages of such investments.

So, discover five important issues you need to be aware of if you’re considering putting money into an offshore bond.

1. The charges can eat into your investment growth returns

The charges incurred through an offshore bond can be very high compared to alternative investment platforms.

As a result, such charges can offset any potential increased investment return you may be anticipating through investing offshore.

What’s more, there are a range of different charges that you may see applied to your investment. Some of the most common ones I’ve seen include:

  • An establishment charge of 10% or more on any capital investment lump sum made into your bond
  • Ongoing administration costs charged either as a flat fee or a percentage
  • Entry charges of up to 5% on the underlying investments – this may be explicit or levied through a ‘bid-offer spread’
  • Ongoing annual management charges on the underlying investments of 2% in some cases.

Looking at these figures, it’s easy to see how these ongoing charges can seriously eat into your investment growth each year and reduce the effectiveness of the offshore status and gross roll-up you benefit from.

It’s important to note however, that a lot of the fees and charges outlined above can be reduced significantly by working with an advisory firm that operates a transparent and fair approach to charging – notably through fees that are not linked to these products. Bear in mind that the high fees you’ve read about above are what enables the offshore bond providers to pay out high commissions.

2. The terms and conditions can often be opaque

Investments advised on in the UK come under the remit of the FCA, so there’s a regulatory regime to ensure the terms and conditions are accessible and not misleading.

Outside the UK, however, not all other regulatory bodies are as strict as the FCA. This means that you may well not benefit from the same levels of investor protection you enjoy in the UK. An obvious example is where commission payments from product providers and fund houses are banned, which is not the case in many offshore expat jurisdictions.

Furthermore, the contract terms may not be as clear and understandable. For example, there may be certain restrictions around surrendering your bond and, importantly, the segmentation arrangements – particularly if you’re looking to draw income regularly from your bond.

Different tax regimes have different restrictions as to what you can and can’t do with your money once your bond is set up.

You need to check the terms carefully at outset to ensure it’s appropriate for your specific investment purposes.

3. A warning for remittance basis users

Non-domiciled individuals can benefit from claiming the remittance basis of taxation.

For remittance basis users, any offshore income or gains that are not brought into the UK do not need to be reported to HMRC and no tax is payable unless subsequently remitted into the UK at a later date.

However, this does not extend to gains that are realised on offshore bonds. Therefore, any chargeable gains realised by a remittance basis user will be reportable and taxable even if the funds never come into the UK.

However, offshore bonds are a key tool for deferring tax on investment gains for remittance basis users. It’s just important to be aware of this trap.

4. Beware of personalised portfolio bonds

British expats are often targeted by investment salespeople selling personalised portfolio bonds (PPBs).

The sales pitch around these will often highlight the fact that you will have more control over the investment choice, rather than being limited to funds offered by bond providers.

However, this increased investment choice has a nasty sting in the tail. Because of the investment structure of these types of bond, all chargeable gains are subject to Income Tax once you become a UK tax resident and it is important to understand how this can affect your wider tax situation.

In addition, where bonds have the ability to invest in individual company shares for example, each year the bond will be deemed to have grown by 15%, regardless of the actual growth, and tax will be due.

This deemed gain will be taxed at your marginal rate of Income Tax in each year.

5. Financial advice is paramount if you’re looking to invest offshore

Given the complexity of some offshore bonds, I would strongly recommend you seek advice, both if you’re planning to invest offshore or if you have concerns over any investments you’ve previously been sold.

Unwinding unsuitable investments can be time-consuming and potentially costly, so the sooner you start the process, and potentially put your mind at rest, the better.

In a previous article, The Good, the Bad and the Ugly – offshore investment as an expat, I highlighted some of the types of investment you should steer clear of.

Remember that the taxation situation will be heavily dependent on your personal circumstances and future plans. So, expert advice is particularly important if you are planning to return to the UK in the near future.

This is not to suggest that offshore bonds don’t have an important role to play in an effective investment strategy, particularly if your intention is to remain an expat in the long term.

Get in touch

If you’re thinking of using offshore bonds or are concerned about any current investments in your portfolio, then please get in touch.

You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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