Offshore bonds

These are bonds usually based in the offshore centres of the Channel Islands or Isle of Man. Their tax treatment means they are suited to expatriates or UK residents who expect either to move abroad in the future or who expect their tax status to change.

  The main benefit of offshore bonds, which are usually run by life companies, is that the gains on the investments are rolled up - this means they are not subject to tax at that time. Onshore life insurance bonds, in contrast, pay tax on income or gains on underlying investments. This means that offshore bonds should get a boost to their returns.

  With offshore bonds, you can withdraw up to 5% of the capital investment every year without paying tax on it. If you are a UK taxpayer, then you won’t pay income tax until you cash in the bond completely or partly. So, if you wait until you are a non-taxpayer before doing this – or you move abroad - you’ll minimise the UK tax you’ll pay.

  However, the charges on offshore bonds can be high and the tax benefits if you are planning to move abroad before withdrawing the bond will depend on what the local tax rules are in your new overseas country. These are the kind of investments that you really do need financial advice for as the tax implications can be complicated.

Offshore funds

As well as offshore bonds there are offshore funds. These are effectively unit trusts or Oeics based outside the UK (such as Luxembourg-based SICAVs). You can hold them in an Isa just like onshore funds.

The tax treatment of the funds is different from those onshore. The main advantage for the UK investor is that offshore funds offer access to some different markets than those offered by UK unit trusts – such as those in single country emerging markets including – as well as fund management houses which don’t have onshore funds. Do watch out as the investor protection offered can often be less than it is the UK.