Many of those in line for a decent bonus this year may be left wondering what to do with it. Making a lump sum of any kind work hard for the future can be a quandary for the highest earners who hit pension limits and have little protection against the top rates of tax.
The UK tax system has tightened the screw on earnings, savings and investments in recent years, as allowances and thresholds have been cut or frozen, while rates have either risen or remained stable. As tax falls on income, then on growth and increasingly at death, decision-making is also becoming more complex and the future more uncertain, which means many are looking to get more control of how and when they are taxed.
Against this backdrop, offshore investment bonds (OSBs), once a niche planning tool for the very wealthy, are moving towards the mainstream of financial planning.
New investment into offshore bonds hit a record £10.5bn in the year to June 2025, the FT reported last year, more than double the figure for the previous year. That surge is a rational response to a tax system that treats investors less generously and is tougher to navigate with familiar wrappers alone.
It doesn’t take long for high earners to max out their Isas and pensions, especially if they are subject to the tapered annual allowance. Capital gains and income from general investment accounts are taxed more heavily each year, and portfolio adjustments can trigger annual tax bills.
OSBs are a useful remedy for those wrestling with restrictions. They are tax‑deferred investment wrappers, issued as life insurance policies typically domiciled in Dublin or the Isle of Man. The underlying investments are often familiar assets like funds that could just as easily sit in an Isa or general investment account (GIA), but OSBs’ “secret power” is the flexibility and control they give to the timing and size of tax payments.
Income and capital gains within an offshore bond can accumulate without triggering annual tax charges, while holders can withdraw up to 5 per cent of their original investment each year with tax deferred. Tax is generally only assessed when withdrawals exceed that allowance or the bond is fully surrendered, at which point gains are taxed as income at the individual’s marginal rate.
That distinction matters more than it once did. When CGT rates were lower and allowances more generous, tax exposure could be managed efficiently within a GIA, particularly for couples. Today, large GIAs can become tax headaches, as income and realised gains can create significant annual liabilities. OSBs allow investors to defer tax and this can become especially useful for those who expect their marginal income tax rate to fall in future years. This includes those late in their careers whose income might drop into a lower tax band after retirement.
One client, in his second marriage and an additional rate taxpayer, came into a lump sum and wanted to invest it to supplement his income after retirement and help his children through university. He was ready to top up an existing general investment account with the money — but after taking advice found he would be more than £70,000 better off by putting the funds into an OSB, phasing income, using the tax benefits and apportioning segments to the children. Moreover, the OSB gives the investment manager the freedom to sell and create gains with no tax drag.
Pensions are increasingly being drawn down as they will be brought into inheritance tax calculations from April 2027, and as that income will, in large part, be taxable, the ability to “switch off” taxable income from OSBs can help smooth overall tax exposure. The 5 per cent withdrawal facility can provide supplementary cash flow in the early years of retirement, while allowing investments to continue growing on a gross roll‑up basis.
Estate planning is another driver, as ownership of OSBs can be reassigned — to a spouse, adult children or into trust — without triggering an immediate tax charge. When used alongside trust planning, future growth can be moved outside the estate, subject to the usual rules. For families facing higher IHT exposure and fewer reliefs, that flexibility is increasingly attractive.
If families are thinking of moving abroad, OSBs can also play a part in long-term planning for a tax-efficient transition and relocating investments. Another client sold his business and wanted to join his wife in Spain, where he had a second business. We advised putting a large portion of the business-sale capital into an OSB that was set up to work with euros and Spanish tax rules, easing the move and shielding income from tax in the interim.
OSBs are not a silver bullet, and not suitable for everyone. They are likely to be more expensive than holding the same underlying investments directly, and offshore products are not covered by the UK’s Financial Services Compensation Scheme. They require professional advice as their tax treatment — around chargeable events, partial surrenders and the use of “top‑slicing relief” — is complex and needs careful planning. Poorly structured OSBs can produce unpleasant surprises.
Neither are they replacements for pensions, Isas or even GIAs, but they can be powerful components of a broader strategy. Products are secondary in good wealth planning, which starts with people’s needs and objectives, and builds a strategic patchwork of solutions to meet them. To provide as much control as possible, OSBs are the missing piece of the jigsaw for an increasing number of people.
As allowances continue to shrink, reliefs are withdrawn and tax rates rise — with for instance a looming 2 percentage point increase to dividend, savings interest and property income tax, and the April 2027 inclusion of pensions in IHT — offshore bonds are likely to become much more widely adopted. No one knows how taxes or Isa and pension entitlements will change further in the coming years, so holding wealth across several types of wrapper could provide invaluable flexibility.
Ann-Marie Atkins is managing partner at wealth manager Evelyn Partners
