In recent years, changes in tax regulations have significantly impacted individuals who are classified as non-domiciled residents (“non-doms”) in the UK. The introduction of the new Foreign Investment Gains (FIG) regime is one such development that has created a new set of challenges—and opportunities.

To adapt effectively, non-doms are exploring wealth planning strategies that align with the evolving landscape. One such tool that has gained prominence is the use of offshore bonds.

Understanding the FIG Regime

The FIG regime, aimed at capturing the investment gains of non-doms who have income and investments abroad, adds a layer of complexity to international wealth planning. Under this new regime, investment gains from foreign assets may be subject to specific tax implications, even for non-doms who have historically benefited from more favourable treatment.

For many non-doms, the FIG regime means a reassessment of their global financial arrangements. Offshore bonds, which are unique investment structures that combine tax efficiency with flexibility, offer a potential solution for managing these changes.

What Are Offshore Bonds?

Offshore bonds are insurance-based investment products issued by life insurance companies located in tax-efficient jurisdictions such as the Isle of Man, Ireland, or Luxembourg. These bonds allow investors to pool their investments into a variety of underlying funds, such as equities, bonds, and cash, with a focus on tax deferral and estate planning.

Key Benefits of Offshore Bonds for Non-Doms Under the FIG Regime

1. Tax Deferral: Offshore bonds offer a tax-deferral mechanism, allowing non-doms to manage the timing of when they pay tax on investment gains. Unlike investments that are taxed annually, offshore bonds only incur tax liabilities upon a chargeable event, such as withdrawals exceeding the 5% annual allowance or surrendering the bond. This feature allows non-doms to defer their tax payments, giving them greater control over when and how they pay their taxes—particularly useful given the new FIG regulations.
2. 5% Tax-Deferment Allowance: One of the most attractive features of offshore bonds is the 5% tax-deferment allowance. Non-doms can withdraw up to 5% of their original investment each year without immediately incurring a tax liability. This means that even under the FIG regime, non-doms can access liquidity without triggering immediate tax charges, allowing them to effectively manage their cash flow and taxation strategy.
3. Gross Roll-Up: Investments held within an offshore bond benefit from “gross roll-up,” meaning that any gains, interest, or dividends generated within the bond are not subject to tax at source. For non-doms, this means that investment growth can compound without annual tax drag, making offshore bonds an efficient vehicle for accumulating wealth—an advantage that remains relevant despite the FIG changes.
4. Segregated Assets for Remittance Purposes: Offshore bonds also provide non-doms with a solution for managing their mixed funds. Because they are insurance contracts, the investments within the bond are treated as a single asset rather than individual investments. This feature simplifies the segregation of clean capital from taxable gains, which can be helpful for non-doms who wish to remit money to the UK while avoiding unnecessary tax implications under the FIG regime.
5. Estate Planning Benefits: Offshore bonds can be set up to provide significant estate planning advantages. Non-doms can nominate beneficiaries, allowing the bond to be passed on without necessarily falling within the purview of UK inheritance tax (IHT). This aspect is particularly advantageous in light of the FIG regime, as non-doms seek to mitigate exposure to potential tax liabilities across borders.
6. Flexibility and Accessibility: Offshore bonds offer the flexibility to switch investments without immediate tax consequences. This is especially beneficial in times of market volatility or when looking to rebalance a portfolio in response to changes in the FIG regime. The ability to change underlying investments without triggering capital gains tax provides non-doms with a versatile way to adapt their financial strategy to shifting market conditions or new tax regulations.

Mitigating FIG Liabilities Through Proper Structuring

To fully take advantage of the benefits offered by offshore bonds under the FIG regime, it is crucial to properly structure the bond from the outset. To determine the right jurisdiction, underlying assets, and ownership structure to optimise tax efficiency. For example, holding an offshore bond jointly with a spouse can allow both parties to benefit from the 5% annual allowance, effectively doubling the tax-deferred withdrawals available each year.

The introduction of the FIG regime represents a significant shift in how non-doms need to think about their foreign investments and potential tax liabilities. Offshore bonds, with their tax-deferral benefits, flexibility, and estate planning advantages, offer a compelling option for non-doms who need a robust solution to manage their wealth effectively in light of the new regulations. While the FIG regime creates additional complexities, it also underscores the importance of proactive wealth planning. Offshore bonds can serve as a valuable component of a broader financial strategy, allowing non-doms to maintain flexibility, minimise tax liabilities, and continue to grow their wealth in a tax-efficient manner.

If you’re looking for tailored advice on whether an offshore bond is right for you, feel free to reach out. Proper planning can help ensure you’re taking full advantage of the opportunities available while mitigating potential pitfalls.