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Budget boost for offshore bonds

One of the most apparent effects of last month’s Budget was a growth in the numbers of individuals, families and companies seeking tax mitigation strategies.

A key product beneficiary of this trend is offshore bonds. The market has been growing for the last 18 months but the UK Budget has given it added impetus.

An offshore bond can be an attractive product for UK investors who intend to be resident overseas when it matures. So, a 45-year-old high-net-worth individual might buy an offshore bond based in a low tax jurisdiction such as the Isle of Man, Ireland or Guernsey. There will be no upfront taxes and the taxes on maturity will be those payable in the jurisdiction where the investor is then resident.

According to the Association of International Life Offices, the current valuation of the offshore bonds sector is £7bn. Around 70 per cent of the latest schemes feature banks as the end point for deposits.

Guernsey-based Clydesdale Bank International managing director James Blower says: “In April, we saw deposits from offshore bonds rise by 8.5 per cent. This could have been driven by factors other than the UK Budget but there is no doubt there is growing interest from UK investors looking for tax-efficient opportunities.”

Axa Isle of Man managing director Kevin Dean says: “We have seen significant growth in offshore bonds. Investors are looking for alternatives which will help them with long-term planning. We see offshore bonds as part of a diversified portfolio which investors might use to meet individual investment strategies. They offer great potential for investors looking to move outside of the UK to achieve consistent returns and to limit tax exposure.”

Dean says investors achieve maximum return by acquiring a longer-term bond. He says: “However, the investment environment is cautious and some investors prefer to take out bonds for a year and then renew them.”

The product design of offshore bonds is another factor which makes them attractive to investors.

Prudential International head of UK business development Richard Leeson says: “Offshore bonds offer access to a wide variety of investment product classes.

“Clients can invest in most collective investment schemes, especially Ucits-registered products. These bonds also provide access to wholesale funds – where we act as the retailer. This means that restricted entry funds become available to offshore bonds investors.”

Leeson emphasises the flexibility of offshore bonds not only in terms of the product classes which can be used but also where the return can be paid.

“Many clients have property overseas where they intend to retire or spend periods away from the UK. This could be a flat in Portugal or a villa in Spain. Bonds give them the capacity to invest here but access the return in a low tax jurisdiction. Tax has emerged as a key driver. The objectives of tax planning will vary from client to client and here bonds are useful because they provide adaptability.”

The offshore bonds market is in rude health at present. Insurers have capitalised on dissatisfaction with UK personal tax policy, the cautious investment climate and the poor performance of equities generally to market a product which is flexible and resilient.

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