Merryn Talks Money: “Offshore Bonds—What They Are and Who They’re For”
Podcast Host: Merryn Somerset Webb (Bloomberg)
Guest: Paula Steele (Director, John Lamb Hill Aldridge)
Date: November 19, 2025
Episode Overview
This episode dives deep into the world of offshore bonds: what exactly they are, how they work, and which investors they’re best suited for. Merryn Somerset Webb is joined by Paula Steele, a highly experienced specialist in protection and assurance, to demystify these tax-efficient investment wrappers. Together, they discuss tax implications, structural details, best use cases, common misconceptions, and the political risks around offshore bonds—clearing up who truly benefits from these products.
Key Topics and Insights
1. What is an Offshore Bond?
- Definition:
- “An offshore bond is a life insurance policy with effectively either £100 or £1,000 of actual life insurance risk insurance, and the rest is a holding structure for holding investments.”
(Paula Steele, 04:09)
- “An offshore bond is a life insurance policy with effectively either £100 or £1,000 of actual life insurance risk insurance, and the rest is a holding structure for holding investments.”
- Tax Wrapper Analogies:
- Offshore bonds function as tax wrappers, similar to ISAs or pensions: “It's a tax wrapper in the same way as an ISA and a pension.”
(Merryn Somerset Webb, 04:25)
- Offshore bonds function as tax wrappers, similar to ISAs or pensions: “It's a tax wrapper in the same way as an ISA and a pension.”
2. Tax Treatment and Mechanics
- Accumulation:
- “All of them give you the ability to accumulate funds with no income tax, no capital gains tax. … The difference is that when you take the money out… you are going to have to pay tax to get it out.”
(Paula Steele, 04:31)
- “All of them give you the ability to accumulate funds with no income tax, no capital gains tax. … The difference is that when you take the money out… you are going to have to pay tax to get it out.”
- 5% Withdrawals—Myth & Reality:
- You can withdraw up to 5% per year of the initial investment tax-deferred for up to 20 years (“People constantly say, oh, this is so amazing, you can take out 5% a year… well, that's the money you put in the first place… this doesn’t seem particularly marvelous.”
(Merryn Somerset Webb, 06:42) - “It's not [tax free]; you can take out 5% without triggering some kind of tax in terms of the returns that you've got. It’s just a return of your own capital that's coming back to you without tax.”
(Paula Steele, 06:18)
- You can withdraw up to 5% per year of the initial investment tax-deferred for up to 20 years (“People constantly say, oh, this is so amazing, you can take out 5% a year… well, that's the money you put in the first place… this doesn’t seem particularly marvelous.”
- Tax on Exceeding 5% Withdrawals:
- “If you take out more than the 5% accumulated, then you're having to pay tax on the element of the gain.”
(Paula Steele, 08:51) - Income tax (not capital gains tax) is due on gains when drawing more than the 5%—this can be significant if mismanaged.
- “If you take out more than the 5% accumulated, then you're having to pay tax on the element of the gain.”
3. Top Slicing Relief
- How it Works:
- “You benefit from something called top slicing relief… take the gain, divide it by the number of years held, add that to your income for the year—may keep you in a lower tax bracket.”
(Paula Steele, 09:58) - Key for those not already in the highest tax band.
- “You benefit from something called top slicing relief… take the gain, divide it by the number of years held, add that to your income for the year—may keep you in a lower tax bracket.”
4. Costs and Minimum Investments
- Fees:
- Offshore bonds carry wrapper fees, which are percentage-based and decrease with larger investments:
- £100k: ~0.5% per year
- £10 million: as low as 0.15%
(Paula Steele, 11:31)
- Additional costs include investment management and advisory fees.
- Offshore bonds carry wrapper fees, which are percentage-based and decrease with larger investments:
- No Contribution Limit:
- “No.” (Paula Steele, 11:21) — Unlike ISAs, there’s no upper cap on contributions.
5. What to Put Inside an Offshore Bond
- Best Fit:
- “It should only ever be used for equity and bond portfolios.”
(Paula Steele, 13:16) - Holding direct equities can trigger punitive tax charges (PPB rules)—best used with discretionary managers or pooled funds/ETFs.
- “It should only ever be used for equity and bond portfolios.”
6. When (and When Not) to Use an Offshore Bond
- Last-Resort Wrapper:
- “This is something you wouldn't touch with a bargepole until you'd absolutely used up all your allowances in your other wrappers… Very much the last choice.”
(Merryn Somerset Webb, 14:22) - “I think it's the last choice of wrapper if you're going to hold it in the very long term.”
(Paula Steele, 14:46)
- “This is something you wouldn't touch with a bargepole until you'd absolutely used up all your allowances in your other wrappers… Very much the last choice.”
- Ideal for Those Leaving the UK:
- “One of the attractions of offshore bonds is that if you leave the UK… you will be able to surrender it with no tax charge [depending on residence rules].”
(Paula Steele, 15:10) - There is a five-year “catch up” if you return.
- “One of the attractions of offshore bonds is that if you leave the UK… you will be able to surrender it with no tax charge [depending on residence rules].”
7. Inheritance Tax & Planning Vehicles
- Not Inheritance-Tax Effective Alone:
- Offshore bonds do not remove assets from one’s estate for IHT purposes by default.
- Combined with trust structures (like gift and loan schemes), they can become part of sophisticated estate planning.
- Gift and Loan Schemes:
- “I'm going to set up a trust, I'm going to lend the trustees £100,000 and they're going to pay me back 5% a year. But all of the gain is going to be for the benefit of my kids.”
(Paula Steele, 18:22) - Useful for long-term planning and those wishing to retain capital access.
- “I'm going to set up a trust, I'm going to lend the trustees £100,000 and they're going to pay me back 5% a year. But all of the gain is going to be for the benefit of my kids.”
8. Political Risk
- Potential for Regulatory Change:
- “Surely there must be political risk around this kind of wrapper… I mean, I can already feel myself coming over all Reeves and saying, ‘away with that one’.” (Merryn Somerset Webb, 19:21)
- Historically, governments see more income tax from offshore bonds, but “we're in a different political world today and everything has political risk.” (Paula Steele, 20:20)
- Advice: wait for the next budget before making new commitments.
9. Who Should NOT Use Offshore Bonds
- Short-term Investors:
- “If you are going to need a large amount of capital suddenly… It should be money that is going to be invested in the long term.”
(Paula Steele, 17:06)
- “If you are going to need a large amount of capital suddenly… It should be money that is going to be invested in the long term.”
- Anyone Who Hasn't Used ISA/Pension Allowances:
- Not suitable as a first- or even second-choice tax wrapper for most investors.
Notable Quotes & Memorable Moments
-
On 5% Withdrawals:
- “People constantly say, oh, this is so amazing, you can take out 5% a year. … That’s the money you put in in the first place… this doesn’t seem particularly marvelous.”
(Merryn Somerset Webb, 06:42)
- “People constantly say, oh, this is so amazing, you can take out 5% a year. … That’s the money you put in in the first place… this doesn’t seem particularly marvelous.”
-
On Complexity and Confusion:
- “The 5% comes back without any tax implications because you’re just deferring the gain…”
(Paula Steele, 08:28)
- “The 5% comes back without any tax implications because you’re just deferring the gain…”
-
Warning on Tax Pitfalls:
- “You can find that you get a horrific tax charge if it's not properly handled.”
(Paula Steele, 09:04)
- “You can find that you get a horrific tax charge if it's not properly handled.”
-
On Political Risk:
- “We're in a different political world today and everything has political risk. Yeah, I think probably I'd wait if I was going to think about an investment at the moment, I'd wait till after the budget.”
(Paula Steele, 20:20)
- “We're in a different political world today and everything has political risk. Yeah, I think probably I'd wait if I was going to think about an investment at the moment, I'd wait till after the budget.”
Timestamps for Key Segments
- [04:09] What is an offshore bond?
- [05:52] Tax treatment—accumulation and withdrawals
- [07:06] 5% withdrawals explained
- [09:58] Top slicing relief & tax optimisation
- [11:21] Contribution limits and cost structure
- [13:16] What you can and cannot hold inside
- [14:46] Offshore bonds as ‘last resort’ wrappers
- [15:10] Tax implications for UK leavers
- [17:06] Who should/shouldn’t consider offshore bonds
- [18:22] Gift and loan schemes
- [19:21] Political risk and future of offshore bonds
Summary: Who Should Consider Offshore Bonds?
- Ultra-high net worth or “very, very comfortable” investors who have already maxed out other allowances
- UK residents potentially planning to emigrate, but aware of catch-up rules
- Sophisticated estate planners working with trusts or gift and loan arrangements
- Investors with genuinely long-term horizons, willing to pay for advice, and who understand withdrawal/tax pitfalls
Not for:
- Ordinary investors with open ISA/pension allowances
- Those who need frequent or substantial access to their capital
- Anyone not ready to seek investment/tax advice
Tone: Relaxed but precise, breaking down complex tax structures and deflating common myths, with both participants showing healthy skepticism toward over-marketed offshore solutions.
In Merryn’s words:
"If there's one thing you take away, it's that these are far from the most exciting or efficient wrappers—until your other options run out, and even then, proceed with caution and professional advice."