As hard-working families seek ways to shelter their assets from the creeping inheritance tax (IHT) net, one tactic used by the wealthy is on the rise.
High earners who’ve already used up their maximum tax-free allowances for pensions and Isas are showing a renewed interest in offshore bonds, thanks to plans announced in Rachel Reeves’s maiden Budget as Chancellor to include unspent private pensions within the scope of the death levy.
Ben Klein, a senior wealth manager at financial planning firm Tideway Wealth, said: “Since the 2024 Budget, people who never thought inheritance tax was their problem are now doing the maths and realising it very much is. Lots more of the enquiries we are getting about these bonds are linked to IHT or legacy planning.”
To find out how these schemes work and whether there’s any danger of tax evasion, we’ve spoken to wealth managers and financial planners from some of the UK’s biggest firms.
How do offshore bonds work?
An offshore bond is an investment wrapper, typically issued by a life assurance company, based in jurisdictions such as the Isle of Man or Dublin – hence the term “offshore”.
The bonds can hold a range of underlying assets including funds, equities and cash deposits.
A key feature is the fact income and gains generated within the bond can largely accumulate free from tax.
Sue Allen, a chartered financial planner at Chester Rose, said: “One of the main advantages of an offshore bond is known as ‘gross roll-up’. Unlike an onshore bond, the investment grows without UK income tax or capital gains tax being deducted within the fund.”
The bonds are also valued for their flexibility.
David Little, a financial planning partner at wealth manager Evelyn Partners, said: “By controlling withdrawals, the investor can defer and manage when a tax liability arises. This differs from an ‘unwrapped portfolio’, where tax is payable each year on dividends, interest and realised capital gains, regardless of whether the proceeds are actually withdrawn from the investment.”
