Onshore vs. Offshore Bonds – The Pros and Cons

When it comes to offshore bonds and investment opportunities, there remains a tremendous amount of scepticism. After all, these assets are often misunderstood within the wider community, due to the fact that they can be used to hide income and drive tax evasion.

Despite this, offshore bonds remain a viable asset class for investors to pursue in the current climate, while there they also have similarities with onshore alternatives.

In this post, we'll look at the similarities and differences between these two entities, and ask which is likely to offer the best returns in 2018.

In simple terms, offshore bonds are assets that are issued from tax havens outside of the UK's jurisdiction. Prominent locations include Dublin, Luxembourg, the Channel Islands and the Isle of Man, while any income accrued through an offshore bond will not be subjected to taxation.

Conversely, onshore bonds are issued from within the UK's borders and initially liable for the basic, corporate tax rate of 19%, along with capital gains after the deduction of indexation allowance.

Interestingly, there are also a number of similarities between these two types of bonds, as switching between funds does not give rise to a personal liability tax. Similarly, 5% of the amount invested can be withdrawn tax deferred for a maximum of 20 years, with this allowance cumulative and capable of being rolled over for future use. This could lead to a large, lump sum withdrawal further down the line, and one that will not be immediately taxed.

Both bonds are also easy to administer, and they're non-income producing assets. This makes them easy to administer, as there are no reporting requirements to HMRC until a chargeable event occurs.

The Last Word – Onshore vs. Offshore Bonds in the Current Climate

In this regard, there are more similarities between onshore and offshore bonds than initially meets the eye, with the tax benefits of the latter standing out as the most obvious. Still, with wealth management firms keen on optimising their margins and those of their clients, it's important to consider each option in the context of the current, economic climate.

With this in mind, offshore bonds may represent the best option in the current climate. After all, the global economy is poised to grow at its fastest rate in seven years in 2018, while the UK will slump to its weakest expansion since the last recession. This makes it possible to pursue far greater gains abroad, while offshore bonds are also portable and particularly appealing for clients who may be planning to move or retire overseas.

Offshore bonds also offer far greater flexibility and agility, while the accrued funds can be protected from future inheritance taxation. As a result, it's an excellent vehicle for building wealth and saving for long-term costs such as school fees or university costs.

These considerations, along with the obvious tax benefits, help offshore bonds to stand out from the crowd in the current economic and financial climate.