Expert Insights

Expert Insights

Sweet surrender: offshore life insurance policies for non-UK domiciliaries

Historically, UK resident non-domiciliaries have tended to hold liquid assets in one of two ways: within a directly-held investment portfolio or via an offshore trust.

However, there is a third option which, until now, has been widely overlooked by such individuals and their advisers. Single-premium life insurance policies, commonly known as life bonds, have long been considered as potential investment vehicles for UK domiciliaries but should now be considered equally by non-UK domiciliaries, particularly in light of changes to the regime for the taxation of offshore trusts.


Historically, one of the principal attractions of living in the UK for non-UK domiciliaries has been the availability of the remittance basis of taxation. In essence, this regime prevents non-UK domiciliaries becoming subject to tax on non-UK income and gains arising during their period of UK residence, unless and until the relevant proceeds are brought to the UK. As is well known, fixed annual tax charges are generally payable from the eighth tax year of residence, if the remittance basis is used. Such changes start at £30,000 and later increase to £60,000.

Following significant legal changes in 2017, the availability of the remittance basis is now limited to those non-UK domiciliaries who are not yet “deemed domiciled” in the UK. Once a non-UK domiciliary has been UK resident for 15 of the previous 20 tax years he will become deemed domiciled and so taxed on an arising basis on his worldwide income and gains. In addition, non-UK domiciliaries who were born in the UK with a UK “domicile of origin” are no longer able to claim the remittance basis under any circumstances.

This limitation of the remittance basis has intensified the issue of how non-UK domiciliaries in the UK should invest their wealth tax-efficiently and practically.

The classic answer to this question is that non-UK domiciliaries should: 

  • avoid all UK situs investments, and 
  • use banking procedures to separate, or “segregate”, their non-UK income and gains from their “clean capital” (ie assets which do not represent or derive from non-UK income and gains from a period of UK residence and so can be brought to the UK free of tax). 

However, this approach only protects foreign income and gains from tax in the first 15 years of residence (ie while the remittance basis of taxation is available). Moreover, it can be difficult to implement.

Offshore trusts, providing valuable long-term IHT protection, have also been a popular vehicle for non-UK domiciliaries wishing to defer tax on their non-UK income and gains.  In theory, this deferral should survive the acquisition of a deemed domicile by the settlor, but complex and poorly-drafted new legislation means the position is far from clear in practice.

Life bonds have always offered long-term deferral of tax for policyholders and now provide an opportunity for non-UK domiciliaries to extend the deferral of tax on non-UK income and gains beyond their fifteenth year of UK residence.  

Personally held cash / investment portfolio


The key to maximising the benefit of the remittance basis in relation to personally held investments is to maintain the maximum clean capital possible so that it can be used for UK spending without triggering any tax. This is typically achieved by segregating the foreign income and gains from the clean capital.

If the clean capital is held in cash, segregation of income and capital is very straightforward: any interest arising on the cash is simply paid directly, or “mandated”, into a separate income account.  

Matters become more complex when the cash is invested. Although income segregation remains comparatively simple (dividends, interest and bond coupon payments are mandated to a separate income account), segregation of gains is less effective. Where an asset standing at a gain is sold, the gain element cannot be separated from the capital element and so the entirety of the proceeds must be paid into a separate gains account. Assuming investments are generally sold at a gain, the clean capital portfolio will be depleted very quickly.  

Borrowing to invest

A potential solution to this predicament is for the non-UK domiciliary to borrow against the security of the clean capital account and invest the borrowed monies as he or she wishes. Provided that all the investments are non-UK situs and the proceeds are all kept abroad, no UK tax will arise in respect of the invested monies. The clean capital account is left in cash and over time becomes available for UK spending, as loan repayments are made to the lender which incrementally releases its security over the clean capital account. 

Careful planning is required to ensure that the segregation process operates smoothly and this arrangement is tax-efficient only for as long as the remittance basis is claimed. This will incur a remittance basis charge from the eighth year of residence, and the remittance basis will cease to be available altogether after 15 years. 

In addition, the ability to withdraw cash from the clean capital account is dependent on investment growth, so this arrangement is not very flexible. 

Investments held via an offshore trust

Offshore trusts have long been a popular and attractive option for non-UK domiciliaries. A significant advantage is the indefinite IHT protection offered by trusts established by individuals who are non-UK domiciled and not deemed UK domiciled when the trust is created and funded. Non-UK situs assets held by such trusts are generally outside the scope of inheritance tax, even following the acquisition of a deemed UK domicile by the settlor.  

While trusts settled by UK domiciled individuals are typically transparent in relation to those individuals (ie income and gains within the structure will give rise to tax for the settlor on an arising basis), offshore trusts have until recently allowed the deferral of tax on non-UK income and gains for a non-UK domiciled settlor claiming the remittance basis. Instead, distributions made to UK resident beneficiaries give rise to tax by reference to the income and gains which have arisen within the trust.

A legal overhaul

However, recent Finance Acts have made sweeping changes to the taxation of offshore trusts. In theory, the deferral of tax on non-UK income and gains for non-UK domiciled settlors has been preserved and the default position is that this applies even after the acquisition of a deemed UK domicile. However, issues with the drafting of the recent legislation mean that, in many cases, the treatment is uncertain and can be counter-intuitive.

The detail of the new legislation is beyond the scope of this note. However, by way of example, one would expect offshore income gains (gains realised on the disposal of interests in certain offshore funds) arising within a trust created by a foreign domiciliary to qualify for tax deferral, but in fact (if the legislation is taken literally) such gains now give rise to an immediate tax charge for a deemed domiciled settlor. Underlying companies are also particularly problematic under the new legislation. Non-UK source income of such companies which in principle ought to be protected from arising basis taxation may, in fact, give rise to immediate tax charges for a deemed domiciled settlor.

Such issues may be avoided with a simple trust structure where offshore income gains will not arise (ie a trust which directly holds a portfolio of non-UK situs investments, with no interests in non-reporting offshore funds). In addition, where new trusts are being established there remains scope to use underlying companies if the structure is funded carefully.

If the issues posed by the new legislation can be satisfactorily dealt with, there are still many advantages to an offshore trust. In particular, there is no need for the settlor to pay remittance basis charges in order to benefit from the tax deferral, and that deferral will survive the acquisition of a deemed UK domicile provided that the trust is not “tainted” (broadly, provided that no property or income is added to the trust following the acquisition of deemed domicile).  

Offshore life bonds
The name’s bond…

Life bonds are not debt instruments, and have little in common with bonds in the normal sense of the word. Although they are, formally, a kind of life insurance, they have little in common with the term insurance or whole of life insurance which most individuals are familiar with. They are contractual arrangements between a policyholder and a life insurance company, under which payments may become due to the policyholder in a number of circumstances, and not only on the policyholder’s death. In fact, it is rare for the original policyholder’s death to trigger a payment under the terms of the policy, as typically the policy will be written on the lives of numerous individuals including the original policyholder and his or her descendants.

In the case of an offshore life bond, the life insurance company is non-UK incorporated and non-UK resident. For most UK taxpayers, it does not matter very much whether a life bond is onshore or offshore. However, for foreign domiciliaries this can be crucial, for reasons explained below.

Under the terms of the life bond, the policyholder has a right to payment on a partial or full surrender of the bond or on the death of the last surviving life assured. There is a single initial “premium” payment and the sum payable on the maturity or surrender of the policy is linked to the performance of a portfolio of investments held by the life insurance company. The element of life cover is typically negligible, and in practice the sum payable on maturity or surrender is almost exclusively determined by the value of the portfolio.

Don’t get personal

It is essential that the policy does not fall within the tax definition of a personal portfolio bond, as any policy which does fall within that definition is subject to a penal tax regime if the policyholder is UK resident. However, most insurance providers with a UK resident client base design their life insurance products so as to steer clear of this penal regime.

Roll up, roll up

The regime applicable to offshore life bonds is complex in its detail but fairly straightforward in essence. Essentially, income and gains are rolled up within the bond and tax will only arise on certain chargeable events, principally the surrender (either partial or full) or maturity of the policy. However, there is an annual tax free withdrawal allowance of 5% of the initial premium paid, available for each of the first 20 insurance years, so that over the course of 20 years the whole of the original premium can in principle be returned to the policyholder tax-free. If the annual allowance is not used in one year it can be carried over to the next year. Withdrawals which do not exceed the available annual allowances will not give rise to tax for a non-UK domiciliary when brought to the UK provided that the initial premium was funded with clean capital.  

Withdrawal method

Withdrawals in excess of the available annual allowances are subject to income tax rather than capital gains tax. While a full surrender of the bond will typically realise the actual gain accrued on the underlying investments, a partial surrender will result in the realisation of a deemed gain, which may be considerably higher than the actual gain. Life bonds commonly comprise multiple “segments” (ie sub-policies), which require careful handling. Where there is a requirement to withdraw a sum greater than the available tax-free allowances, generally a full surrender of individual segments should be made rather than a partial surrender of all segments, so that the tax charge is proportionate to the economic gain on the linked investment portfolio.


The principal disadvantage of life bonds for a foreign domiciliary is the fact that the remittance basis is not available in relation to life policy gains. As a result, any withdrawal from a life bond in excess of the available annual allowances will give rise to tax if the foreign domiciliary is UK resident, regardless of where the proceeds are received (and even if the policy is an offshore life bond). 

This means that it is not possible for a foreign domiciled policyholder to realise the value of his or her policy while UK resident without this giving rise to tax.

Compare this to an offshore trust, which can be wound up while the individual is UK resident but not yet deemed domiciled without giving rise to any UK tax, provided that the proceeds are received and kept offshore.  

A further disadvantage for some individuals is the restriction on the policyholder’s ability to control the composition of the linked investment portfolio. Too much discretion on the part of the policyholder will result in the policy becoming subject to the penal tax regime for personal portfolio bonds noted above. Only very limited categories of investments may be selected by the policyholder, namely cash and certain collective investment schemes (eg OEICs and authorised unit trusts). In practice therefore, the investment portfolio must be under discretionary management, which may be unattractive to some individuals.

Who should be interested?

Offshore life bonds have long been of interest to UK domiciliaries but may now be attractive to UK resident non-UK domiciliaries seeking an alternative to an offshore trust, and to non-UK domiciliaries who intend to become UK resident in future and are considering their planning arrangements.

Offshore life bonds have some very significant selling points for non-UK domiciliaries: 

  • Life bonds eliminate the need to avoid UK investments, which can be troublesome in practice
  • They also eliminate the need for segregation, since income and gains roll up within the policy tax-free
  • There is no reliance on the remittance basis to benefit from tax deferral, which creates scope to avoid remittance basis charges 
  • The tax deferral offered by life bonds is potentially indefinite in duration, whereas, as already noted, the deferral provided by the remittance basis “runs out” after 15 tax years.
Possible approaches

(1) Existing RND with mixed funds
The “cleansing” relief introduced by the Finance No. 2 Act 2017 could be used in conjunction with a pair of offshore life bonds to great effect. A UK resident non-UK domiciliary with a mixed fund (ie a fund comprising both clean capital and non-UK income and gains) could “cleanse” his or her funds to extract the clean capital from the non-UK income/gains. Any such steps would need to be taken before 6 April 2019.

The clean capital could then be invested in one offshore life bond, withdrawals from which could be used for UK spending; whereas the non-UK income/gains could be invested into a second bond to be used for overseas spending.

If funds are to be invested in a life bond which are, or contain, non-UK income or gains, it is essential that the policy is an offshore life bond. Use of such funds to pay a premium to acquire an onshore life bond would result in a taxable remittance.

(2) Incoming RND with clean capital
In another scenario, a non-UK domiciliary moving to the UK and anticipating a significant source of UK income (eg a UK salary) may wish to invest his or her clean capital (ie pre-residency assets) into an offshore life bond. Capital growth and tax deferral would be secured indefinitely and tax-free withdrawals within the annual allowance could be made as and when needed.

(3) Exit strategy
In each case, the bond(s) could then be surrendered in full following acquisition of non-UK residence without any UK tax consequences. Care would however need to be taken with the rules on temporary non-residence, which could impose a UK tax charge on the surrender if the individual becomes UK resident again at a later date.

Best of both worlds?

Perhaps the ultimate planning option for a non-UK domiciliary would be to settle his or her offshore life bond on trust just before his or her fifteenth year of residence. The income tax treatment discussed above will remain applicable, as the policy gains will automatically be attributed to the settlor (regardless of whether the settlor can benefit from the trust). However, IHT protection will be secured in relation to the offshore life bond beyond the settlor’s acquisition of a deemed UK domicile. Withdrawals within the available annual allowances can be distributed out of the trust tax-free. As there is no need for the trust to be non-UK resident, it may even be feasible for the non-UK domiciliary to be a trustee of the trust.  Running costs for a UK resident trust may be significantly lower than is the case with an offshore trust.  

In the right circumstances, an offshore life bond will now be a very attractive third way for non-UK domiciliaries. However, great care will be needed with the structuring and professional advice should always be sought first.

This article was written by Catrin Harrison and Dominic Lawrance. For more information please contact Catrin on +44 (0)20 742 6514 or at, or alternatively Dominic on +44 (0)20 742 6749, or at dominic.lawrance@






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