ISA Alternatives for British Expatriates

An individual savings account (ISA) is a popular savings vehicle for those resident in the UK who wish to save some money tax efficiently. Each year, a British resident is allowed to save up to £7,200 in stipulated cash, share and life assurance products.

As expatriates, and therefore potentially none UK tax-payers, we should not be investing in ISA’s as we should not be receiving any tax benefits when we are not paying tax in the first place. But why would we want to?

ISA’s may be popular with UK residents, who have no viable alternatives, but the stipulations on how much can be invested, and what this can be invested in, make ISA’s very inflexible compared with their offshore alternative.

The most popular alternative is an offshore bond. An offshore bond (also known as a personal portfolio bond or collective investment bond) is a life assurance contract offered by the larger financial institutions in the British offshore jurisdictions.

Whilst an offshore bond is technically a life assurance contract, this is purely to give the bond many of its tax advantages. In reality, an offshore bond is primarily an investment vehicle and the death benefit is simply the value of the fund less any outstanding charges (subject to a minimum of 101% of the investment made).

With minimum investments starting at just £10,000 (or currency equivalent for those who wish to save/invest in US Dollars or Euros), most offshore bonds can hold any freely tradable asset; i.e. cash, bonds, unit trusts and collective investment funds, structured investments, capital protected investment funds, stocks and shares. Property cannot be held in an offshore bond as it is not deemed to be freely tradable.  There are also monthly contribution versions of the product. 

Existing assets can be transferred into an offshore bond or cash can be transferred into the bond and investments purchased. Many assets (particularly investment funds) can be purchased at favourable rates through the bond. Because the assets are being purchased by the life assurance company on the bondholders behalf, upfront charges are usually waived (or reduced to an insignificant level) and minimum investment levels are often reduced from US$ 50,000 per asset to US$ 10,000 per asset; this allows the average investor to build a significantly more diverse portfolio of assets than they normally could through direct investment.

The main reason that many expatriates establish an offshore bond is that they are non-income bearing and therefore do not create a taxable event so long as money is not withdrawn from the bond; even when they have repatriated to the UK (or anywhere else in Europe).

Within the industry this is known as ‘gross roll up’ and no taxable event occurs because any growth or dividend remains within the bond either as additional units, shares or cash. Outside the bond, any savings or investments made whilst offshore would be would be taxable at the highest applicable rate upon the owners return to the UK. This even applies to offshore bank accounts.

Likewise, if an investor sells an offshore asset (whether to cash it in or purchase another asset) whilst resident in the UK, this would usually trigger a capital gains tax liability. Within an offshore bond, the disposal of an asset is treated as an internal transfer of asset classes (i.e. from shares to cash) and consequently does trigger a taxable event. Therefore, offshore bonds often provide a more economical and tax-efficient structure for active investment management.

In most high-tax jurisdictions, the only time a taxable event is only triggered is when a partial withdrawal is made from the bond or the bond is totally cashed-in. Because the offshore bond does not trigger taxable events it can be declared to the tax authorities; ensuring the bondholder does not breach of any rules or regulations of their country of residence.

At this time, the tax payable is either income tax or capital gains tax (on a larger withdrawal or total encashment). Capital gains tax is usually calculated from the date of repatriation (as opposed to the date the bond was established) until the date of taxable event. This is known as time appointed relief.

Many expatriates put aside the money they have saved whilst offshore to supplement their retirement in later life. An offshore bond has two basic benefits here:

Firstly, because their assets continue to grow tax-efficiently offshore, the compounded growth is substantially higher; giving the policyholder a larger ‘pot’ of money when they reach retirement.

Secondly, when people retire, they usually drop at least one tax band. By ‘deferring’ the tax from when they are a higher rate tax-payer to when they are a basic rate tax-payer (or even lower-rate) they can make substantial tax savings; enhancing their retirement income further.

An additional benefit for those looking to draw an income from the bond is that, if structured correctly, partial withdrawals of up to 5% of the investment made can be taken from the bond with the income tax deferred. This means the policyholder would be drawing an income gross of taxation – an excellent way to supplement your retirement income even further!

The contents of this document only represent a general summary and should not be a substitute for specific advice. The tax consequences for each individual will depend upon their personal circumstances so it is essential that individuals take appropriate professional advice accordingly.

Candour Consultancy advise on a wide range of offshore bonds. To speak with a fully qualified consultant from Candour Consultancy about your personal circumstances and options, just click the button below to provide us with some basic information and your preferred contact details.