Do you have a bond with policies, RL360, FPI, Generali, OMI, Zurich (some have undergone name changes or mergers in recent years) these are commonly sold to expats in UAE, Asia Pacific and many other areas mainly for the ‘tax benefits’. Here is where I want to explain offshore bonds for expats so they can understand whether they would be a good investment for them!
As they benefit from tax-free growth, often referred to as gross roll-up. Also, in countries like Australia, the benefits, if they are structured right can be tax-efficient on income. This can for a lot of High Net Worths (HNWs) have a significant impact on the portfolio.
Other than that, for most countries, unless it is brought into the country either the capital or income is not subject to the local taxes.
This is why many U.K expats take these bonds, based on the tax benefits you get. Thus, opting for a good location is important for an offshore bond.
Zurich Offshore Bonds 
Utmost International Offshore Bonds 
RL360 Offshore Bonds
Although, some bonds do offer low-cost options many that have listed above have high-end charges with little flexibility. In this article, I will go over the benefits of offshore bonds and explain to you the options if you have or are considering these bonds.
What is an offshore bond?
It is essentially a tax wrapper that can hold within its structure a number of assets. The “offshore” is based on the tax in many jurisdictions having little to no tax.
Mainly, the Isle of Man is used as a common location. While, the structure, of these, have a life insurance element with a portfolio that investors can use to buy/sell assets through.
It is very much the same as OEIC (open-ended investment company) from a tax perspective if you were to hold in the U.K. or elsewhere.
The structure of the bonds is that investors lend money to an entity that borrows the funds for a period of time at a variable or set rate.
Do they work?
Yes, they can but only if structured right. Also, which I have gone over a number of times in the videos and blogs, they are mostly sold with non-transparent fees and structures that are not made clear to the investor. This means they have high fees, long lock-in periods and are sold on tax efficiency when you might not need it.
Offshore bonds usually have a number of fees associated with them. Establishment fee upfront, establishment fee annual, annual management fee, policy fee, custody fee. Policy fees and admin fees are usually set amounts, while the establishment fee and annual management fee will vary based on the amount of commission the IFA charges and the term of the plan.
For example, if you see an establishment period of 10 years charging 1% on the initial investments with an annual management fee of 1% over the original investment. The commission will be based on the term duration and the amount over the base cost. So, for example, if you are getting charged 1.5% over 10 years AMC and establishment 1.5%, the IFA would be getting 5% commission (saying the base cost is 1%).
You need to know the base cost of all the platforms but as they are structured different it is difficult. I have done, a number of articles, on the costs. But, some of the lowest I know are 400 GBP a year base cost with 1% upfront or 0.36% of original policy value, plus a $500 admin charges and $45 dealing charges. So would be wary of anything 1.2% and question it even more if the advisor is putting on a fee of 0.5%-1.5% as well.
In short, these bonds can work for the right person if they are looking for investments medium to long term but costs need to be transparent and most of the costs need to be shown upfront.
Are these tax efficient?
The gains, interest and rent are taxed at 0% although, the income tax is dependent on your location. So, for example in the U.K, it would be on your income band, of 20%, 40%, 45%. Trustees are taxed 45% with the first 1000 GBP being taxed at 20% if no other income is taken.
It also allows a gross roll-up. This is what I have to illustrate for U.S clients, not using offshore bonds but as they are taxed based on their citizenship, but the advantages of this are as follows.
Say you put $100,000 into your account and after year one your investments grow 10% and your tax rate is 20% instead of the $110,000 at the end of the year due to your tax situation it would be $108,000 as you can see if you compound this over 10-20 years it can really start to eat up on your investments.
$100,000 compounded, over 15 years at 10% equates to $417,724.82
while $100,000 at 8% of 15 years, $317,216.91
Also, for U.K citizens it can be used by top-slicing, with 2021, figures top-slicing can be used, an example of your taxable income is 49,000 GBP (20% U.K rate) and you gain 15,000 GBP from the bond in 3 years.
This would be the amount divided by the number of years, 15,000 GBP divided by 3 is 5,000 GBP
Top slicing allows the tax to be applied at different rates, in this case.
For the case above, with an income of 49,000 GBP, 1,270 GBP can be taxed at 20% and 3730 GBP will be taxed at the 40% rate.
The total tax is (254 GBP on the basic rate 1,270 GBP and 1492 GBP at the higher rate 3730 GBP) 1746 GBP which equate to 34.92%.
On onshore bonds, these are taxed to the last chargeable event, not to the inception of the bond.
Tax deferral is one of the main options these are sold on. Ironically, these are sold to a lot of people in locations like the UAE, where tax is low to zero already, so don’t be sold on this basis alone if this is you and are looking to stay in a low to zero tax area.
How does tax deferral work?
This works, in general terms, allowing for 5% to be withdrawn each year as tax-deferred income of the bond. This can be taken every year or build up over a 20-year time frame.
The tax deferral is part of the structure and how it should be set up. As ideally, you would want to take the majority of the income if possible in a low-income tax location or when you are in a lower income tax bracket (when you retire for most). For example, if you plan on being in low tax jurisdiction for the foreseeable future the benefit of these bonds can be lost
This is why it is important to talk to an IFA about this and it can then be structured properly for your needs. If you would like to talk to an IFA, please email me at info@investmentsforexpats.com
What are the main reasons to look at a bond?
Like I have mentioned above, it’s the tax savings if used in the right way. Also known as gross tax roll up and the 5% withdrawal.
The other main one that I can think of is trust and beneficiary options where you can have a full beneficiary option unlike a lot of platforms that is not possible. This might be useful if you have accumulated a significant amount of wealth that you would like to pass on.
What are the best bonds to use at the best prices?
To find the best bonds there are a number of factors you need to consider such as location, security, fees, IFA charges and this information will be individual to you and your situation. To what your presences are, I have in a number of blogs rates the bonds on my personal preferences and review most individually.
Personally, for high net worths on a cost basis, I think the best one in the market is Hansard, I have written reviews on Hansard charging structure. The primary Z1 is 1% upfront and 400 GBP base cost and it is flexible to take in and out.
While those looking for more adventurous or crypto and trading is Custodian, I have written a number of reviews on Custodian. I like the features such as Exante trading with no trading fees and a crypto wallet with a free range of funds. The base cost with no coms is 0.36% for 10 years based on the original policy value and accrued amount with a $500 admin fee and $45 dollars a trade. This like most bonds should be used for those with a longer investments time frame base on the charging structure.
* Note I have no special connection nor do I get paid by them for saying this and seek an IFA to see full specification and get personalised information.
What should I do if I already have a bond?
I have had a lot of people contact me saying that they already hold a bond and want to change it, this is common as they are mainly sold to expats. What can be missed out on is the high charging structure and lock-in periods. This means many expats come looking for other options.
I would always say it’s worth seeking a second option if you are holding the bonds, from both an investment and cost basis as I have seen 100s of expats that have been overcharged and poorly invested.
Finally, it might be worth looking at platform options, as these can be a lot lower cost as some start at 0.25% depending on the amount with good offshore options as IBKR or Novia for an advisor one, but, the benefits of these need to be discussed with an IFA.
