Wealthy Brits are investing unprecedented amounts in offshore bonds as they brace for higher taxes and seek more flexible ways to manage their wealth.
According to the Financial Times, around £10.5 billion was invested in offshore bonds in the 12 months to June, more than double the £5.1 billion a year earlier – representing a record rise in demand for foreign investment securities.
Financial advisers say the trend reflects growing unease among higher earners over the increasingly complex tax landscape in the UK, with Ireland, Luxembourg and the Isle of Man emerging as the most popular jurisdictions for buying new bonds.
The change comes as the government continues to freeze income tax thresholds and reduce tax allowances, pulling more middle and top earners into higher tax brackets.
At the same time, capital gains tax (CGT) for those in higher and additional tax brackets has risen from 20% to 24%, while the annual CGT exemption has been cut from £12,300 to just £3,000 in two years. From 2027, some pension pots will also fall within the scope of inheritance tax.
With new measures for “those with the broadest shoulders” expected in the autumn budget on November 26, wealth managers report that clients are increasingly looking to defer or mitigate future tax liabilities through offshore structures.
“Some investors may be concerned about possible tax rises in the UK,” said Claire Trott, head of retirement and holistic planning at St James’s Place. “Offshore bond funds allow tax deferral while the investment remains in the bond. For others, this could be due to longer-term plans to move offshore.”
An offshore bond is structured as a life insurance policy that allows investors to earn investment returns without paying taxes until the funds are withdrawn. Owners can typically withdraw up to 5% of the original investment tax-free each year for 20 years – an attractive feature for those seeking income flexibility.
Taxes only apply if withdrawals exceed the cumulative exemption amount of 5% or if the bond is fully redeemed. For retirees or those who want to access funds at a time when their income is lower, this deferral can result in significant tax savings.
Offshore bonds can also serve as a succession planning tool, allowing investors to transfer assets to family members – such as children or grandchildren – who may face lower tax rates when the funds are realized.
However, experts warn that while offshore bonds can offer legitimate tax planning benefits, they are not without complexity and risk.
“Offshore bonds are heavily marketed by some firms, but investors should be cautious,” said Helen McGhee, tax partner at Joseph Hage Aaronson & Bremen. “In most cases they do not eliminate taxes but defer them, and that deferral can be compromised in certain circumstances.”
McGhee added that HM Revenue & Customs is already closely monitoring the increase in offshore bond activity. Under the Personal Portfolio Bond rules, investors could face an unexpected tax burden if their holdings are deemed too tailored or if benefits are taken early.
“With increasing popularity comes increased scrutiny from HMRC,” she said. “Investors need to ensure their structures are compliant – otherwise they risk losing the benefits they were hoping for.”
Currently, the surge in offshore bonds highlights how wealthy British investors are adapting to a changing financial landscape and looking for ways to protect their capital in the face of rising taxes and political uncertainty.
But given HMRC’s heightened scrutiny and increasing regulatory complexity, the appeal of offshore bonds may ultimately depend less on secrecy – and more on sound, transparent financial planning.
