The tax benefits of offshore bonds for new and temporary UK residents

From April 2025, the previous tax regime for temporary (or non-domiciled) UK residents changed. These changes translate into new tax implications for certain non-doms.

The old vs. new tax regime

Previously, the concept of the remittance basis of taxation meant temporary residents only paid UK tax on income and capital gains brought into the UK, and not on any worldwide income or gains. From April 2025, this was replaced by the FIG (foreign income and gains) regime.

Under the new FIG rules, any foreign income and gains realised during the temporary resident’s first four tax years of being resident in the UK will be tax-exempt. But after four years of residence in the UK, this tax treatment ends and a resident individual will then be required to pay the same income and capital gains taxes as regular UK taxpayers. This means they become taxable on their worldwide income and gains.

This is a significant and potentially expensive change to the previous remittance basis rules, particularly for high-net-worth individuals who accumulated wealth outside the UK and whose assumption was that those assets would not be taxed. Of course, there are various tax-planning opportunities in the UK to help long-term residents structure assets efficiently. However, as arriving individuals will not have had the benefit of saving into accounts like ISAs and pensions during their lifetime, more of their assets may now be “exposed” to taxation.

Our experience has been that individuals or families that plan to be temporary UK residents, don’t necessarily intend to bring all their assets into the UK. For these individuals, leaving assets offshore and not subject to UK tax under the remittance basis, was a useful planning tool.

Whist the medium term strategy of using the remittance basis has ended, there remains a tried and tested method for investing offshore, removing the requirement to pay annual tax on income or gains but retaining access to capital. In fact, this strategy is available to both long term UK residents and new arrivals.

How can offshore bonds help?

Offshore bonds are investment wrappers issued by life insurance companies based outside the UK. Such investment structures have been in place since the 1960s and are regularly used by both UK and non-UK savers. They have equivalents in most European countries; and with the right planning, can help optimise taxation for both individuals and trusts.

For temporary UK residents, an offshore bond can offer several benefits, including:

• Tax-deferred growth: The growth within the bond is typically free from UK tax until withdrawal.
• Flexibility: Investors can choose from various investment funds and assets within the bond, allowing them to tailor their portfolio to their own risk tolerance and investment goals.
• Tax-free access: Managed carefully, the original capital can be withdrawn tax-free, without realising taxable gains on the profits.

One of the most important aspects of an offshore bond is its flexibility and the ability to take up to 5% of the original capital out each year, tax-free. By structuring the bond so that the annual 5% capital allowance covers likely expenditure needs, income and gains on investments can be deferred indefinitely. Provided the temporary resident does not require funds of more than their 5% allowances, they may never need to pay UK tax on the profits accrued.

As an example, a temporary UK resident could place £500,000 into an offshore bond and have no tax payable on the investment returns inside the bond. They could take 5% per annum (£25,000) for up to 20 years before they have used all the original capital. Only after using all the capital, would future withdrawals be taxable. However, if no withdrawals in excess of the capital are made before leaving the UK and instead, they are only withdrawn after an individual becomes tax resident elsewhere, no UK tax will be payable.

Becoming tax resident in another country comes with its own particularities, depending on the jurisdiction. When choosing an offshore bond, it is essential to have an understanding of the tax position in the country to which the individual might move. This minimises the risk of any future unexpected tax bills.

An offshore bond is not necessarily the only solution for everyone, but it should be considered as part of a holistic and carefully considered financial plan. We encourage anyone contemplating this option to speak to a financial planning professional, who can advise on how a bond will fit into their overall plan and help consider it alongside other potential solutions.

A financial planner can also consider how the bond can work as part of wider strategies, such as gifting bond units to lower-rate taxpayers if withdrawals are in excess of the 5% annual capital allowance. An offshore bond may also be useful when it comes to sheltering profits within trusts that might otherwise become taxable under the FIG regime.

The abolition of the former remittance basis regime is likely to present some challenges for temporary UK residents, but it is still possible to implement strategies to help optimise your tax affairs.

Providing support, strategy and accountability

At Partners Wealth Management, we create financial planning strategies that can help more people be as tax-efficient as possible. If you are new to the UK, a temporary UK resident, or a non-UK resident planning to move to the UK, call Partners Wealth Management on 020 7444 4030 or email us for an initial conversation.

 

The information and/or any reference to specific instruments contained in this article does not constitute an investment recommendation or tax advice. The contents of the article have been prepared solely for information purposes. The article contains information on financial products and services and such information is designed for and addressed solely to individuals seeking generic industry information. This document reflects our understanding of current legislation. Past performance is no guide to future returns.