• Original Article
Higher earners facing a barrage of tax threats are turning to investments overseas as they try to shelter their cash from HMRC
Investors are ploughing record-breaking amounts into foreign bonds as they seek to lower their tax bills.
Financial advisers said that Ireland, Luxembourg and the Isle of Man were among the most popular jurisdictions for buying bonds because they offer significant tax advantages.
Some £10.5 billion was placed in offshore bonds in the 12 months to the end of June, more than double the £5.1 billion from the previous year, according to data reviewed by the Financial Times.
The trend is being driven by the barrage of tax threats that high earners are facing, including frozen income tax thresholds and Isa allowances and higher capital gains tax rates. Some pension pots will also be subject to inheritance tax from 2027.
• Income tax raid could cost higher earners £754 a year
Capital gains tax (CGT) for those in higher and additional rate income bands went from 20 per cent to 24 per cent in the last budget. The tax-free CGT allowance has also dropped from £12,300 to £3,000 over the past two tax years.
The anticipation of further taxes in the budget on November 26, aimed at those with the “broadest shoulders” is partly driving the trend, according to Claire Trott from the wealth manager St James’s Place.
Trott said: “Some investors may be concerned about potential tax increases in the UK, as offshore bond funds allow tax to be deferred while the investment remains within the bond. For others, it may reflect plans to relocate overseas.”
Money newsletter
The latest personal finance and investment news from our money team.
Offshore bonds offer tax deferral, meaning you only pay tax when you take the money out of the bond. The investment wrapper is legally structured as a life insurance policy, allowing you to invest income and accrue gains without immediately paying tax.
You can withdraw 5 per cent of the investment every year for 20 years, tax-free.
When you finally withdraw all the money, or more than 5 per cent, it will be subject to income tax at your marginal rate. This can be helpful for those who want the money for retirement, when their income tax rate is likely to be lower than it is when they are earning.
• I’m buying a house with my daughter. Will it land her with a big tax bill?
Offshore bonds can also serve as a tax-efficient way to pass down wealth, for example to grandchildren who have little or no income and so will pay less tax on the investment.
Helen McGhee from the London law firm Joseph Hage Aaronson & Bremen said that while offshore bonds were becoming popular, they weren’t for everyone because the rules were complicated — and the tax office had them in its sights.
“Offshore bonds are being heavily marketed by some firms, but investors should be cautious. In most cases they do not reduce tax payable; they defer it, and the deferral objective can be compromised in some circumstances.
“HM Revenue & Customs’ Personal Portfolio Bond legislation can trigger an earlier than envisaged tax bill, which could wipe out the expected benefit. Equally, with increasing popularity comes increasing attention from HMRC.”
