Offshore bond

Offshore bond is the everyday name for a life insurance policy from an insurer outside the UK, in places such as the Isle of Man, used mainly for investment. HMRC calls it a foreign policy. For UK tax, an international IUL is treated in the same way as an offshore bond, because both are non-UK life insurance policies.

How UK tax works on an offshore bond

The investments inside grow without an annual UK tax charge, unless the policy is a personal portfolio bond. Tax arises on a chargeable event: a full surrender, maturity, the death of the life insured, an assignment for money, or part surrenders above the allowance. The gain is income, not a capital gain, and on a foreign policy it normally carries no basic rate tax credit.

• 5% allowance. Each policy year, up to 5% of each premium paid can be withdrawn with the charge deferred, for 20 years, so up to 100% of the premium. Unused allowance carries forward. HMRC calls it a deferral, not an exemption.
• Top-slicing relief. For an individual, the gain is spread over the complete years the policy has run, to test whether it pushes income into a higher rate band. Trustees and companies cannot claim it.
• Time apportionment. The gain is reduced in proportion to the days the individual taxed on it (the policyholder or, for a trust, the settlor) was not UK resident while holding the policy, and the years used for top-slicing fall by the whole non-resident years.
• Currency. A US dollar bond's gain is worked out in dollars and converted to sterling at the rate on the date of the event.

Worked example

Illustrative figures, not a forecast. A policyholder pays a single premium of US$500,000.

• The 5% allowance lets US$25,000 a year be withdrawn for 20 years with the charge deferred.
• The policyholder lives outside the UK for the first six years, returns, and surrenders at the end of year ten (ten complete years) with a gain of US$200,000.
• Time apportionment removes about 60% for the non-resident days, leaving about US$80,000 taxable, converted to sterling on the surrender date.
• Top-slicing uses four years (ten less six), so the slice tested against the rate bands is about US$20,000, in sterling at the surrender-date rate.

In an international IUL

An IUL from a Bermuda insurer is a foreign policy, so the same rules apply to a UK-resident policyholder. A policy loan from the insurer to a UK-resident policyholder, or at their direction, counts as a part surrender and uses the 5% allowance. The difference is what sits inside: an offshore bond holds an investment portfolio, while an IUL holds a death benefit and a cash value earning index credits within a cap and a floor, 0% in most contracts.

In a PPLI structure

A PPLI structure from a non-UK insurer comes under the same regime for a UK-resident policyholder, 5% allowance included. A properly structured PPLI invests through suitably diversified insurance dedicated funds, which keeps it outside the personal portfolio bond rules.

Common questions

Is an offshore bond taxed in the UK if I live abroad?

A gain that arises while the policyholder is not UK resident is outside UK income tax, unless the absence is temporary (five years or less, after UK residence in at least four of the previous seven tax years) and the policy was taken out before leaving. A gain on such a policy, other than on a death, is then taxed in the year of return, still reduced for the foreign days.

Is the 5% withdrawal allowance an exemption?

No. Amounts taken count when the gain is worked out on a later chargeable event, such as full surrender. If the policyholder's circumstances have changed by then, for example after a move abroad, less tax may be due.

Go deeper: IUL and offshore bonds compared.

Sources

• ITTOIA 2005, Part 4, Chapter 9: gains from life insurance contracts
• HMRC HS321: gains on foreign life insurance policies (2026)
• HMRC IPTM1510: the 5% deferral rule (ITTOIA 2005 s.507)
• HMRC IPTM3700: foreign policies, differences in treatment
• HMRC IPTM3820: top slicing relief
• HMRC IPTM3734: gains during non-UK residence; time apportionment
• HMRC IPTM3545: policy loans treated as part surrenders

Last reviewed November 2026.