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For individuals who move overseas, and particularly those who intend to return to the UK, there are options available that are worth exploring to help reduce your UK tax exposure, particularly for the period where you are a non-UK resident.
In this article, David Collins, Senior Tax Adviser, explores how Offshore Investment Bonds (OIBs) can be one of these effective tax planning tools. And that despite their potential benefits, many people are unfamiliar with how they work and the opportunities they offer.
What is an Offshore Investment Bond (OIB)?
An Offshore Investment Bond is a tax-efficient investment wrapper. Unlike direct equity or fund investments, growth within an OIB is not subject to UK tax while it remains invested. Instead, tax is deferred until a chargeable event occurs, such as a withdrawal exceeding the cumulative 5% annual allowance, or the full surrender of the bond. This also allows capital of 5% of the initial amount invested to be drawn down on an annual basis with the tax deferred until a chargeable event occurs in the future.
Why should Non-Residents use OIBs?
One of the standout advantages of OIBs, for individuals who are leaving the UK on a temporary basis, is Time Apportionment Relief (TAR). For non-UK residents, an OIB can be an attractive vehicle because investment growth is not subject to UK tax during the period of non-residence. Making it particularly useful for individuals moving abroad for a period and looking to reinvest their gains without incurring immediate tax charges.
It also removes any UK tax filing requirements for individuals who have no other income in the UK. When an individual then returns to the UK and becomes tax-resident again, they do not pay UK tax on the proportion of investment gains that accrued while they were non-resident. This can be a powerful planning tool for those who spend several years abroad, allowing them to benefit from tax-free growth outside the UK tax net.
Inheritance Tax planning considerations
OBIs can also play a role in Inheritance Tax (IHT) planning. A key benefit of both onshore and offshore bonds is that gifting an offshore bond does not trigger an immediate Capital Gains Tax (CGT) liability. The transfer is treated as a gift of a life policy rather than a disposal of individual investments. This can provide flexibility for wealth transfer strategies, particularly for those seeking to pass on assets during their lifetime without crystallising CGT.
The gift is still treated as a Potentially Exempt Transfer (PET) and only outside of an individual’s estate after 7 years. Whilst this can be efficient for IHT purposes, the recipient of the gift would be subject to income tax and capital gains tax when drawing from the bond in the future. So it’s important to consider the overall position and seek advice before making such a gift.
Planning considerations in light of potential CGT rises
Given the recent increases to the CGT rate announced in the Autumn Budget, individuals with significant investment holdings should make it a priority to review their structures. Offshore bonds can allow tax deferral and, in some cases, a lower effective tax rate when gains are ultimately realised. And for those considering a move overseas, structuring investments through an OIB before departure could help manage your long-term tax exposure.
So, if you’re considering a move abroad—or a return to the UK—seeking professional advice on how OIBs fit into your broader tax strategy is essential. By discussing your individual circumstances with an experienced adviser, you can then decide if an OIB is the right investment vehicle for you.
To speak to David or one of the team, call us on 0330 058 6559 or email hello@scruttonbland.co.uk.
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