Onshore vs offshore bonds: which investment bond suits a UK taxpayer?
An onshore bond and an offshore bond are taxed under the same chapter of the same Act. The difference is inside the fund. A UK insurer pays corporation tax on the policyholders' share of its income and gains at a rate tied to the basic rate, 20% now and 22% from April 2027, and you are then treated as having paid basic rate tax on your gain. An offshore insurer pays nothing inside the fund, and you pay the whole bill when a chargeable event happens, at 20%, 40% or 45% today and 22%, 42% or 47% from 6 April 2027. For a higher rate taxpayer with £60,000 of other income, a £40,000 gain costs £14,000 offshore. Onshore, after the fund has borne about £8,000 of tax, the personal bill is £4,400, so £12,400 in all. The offshore bond wins when the gain is taken at a lower rate than the one you pay today, when you leave the UK, or when the portfolio is heavy in interest-paying assets that an onshore fund would tax every year.
Investment bonds come in two forms, and most of the arguments about which is better are really arguments about who the investor will be when the money comes out. This page sets out how the two are taxed, works the numbers for 2026/27 and 2027/28, and lists the situations in which each one is the better choice. The mechanics of the gain itself, and top slicing relief, have their own pages.
By Eldar Edmond Grady, CEO, PPLI.com. Research checked 19 October 2026. Covers UK law for 2026/27 and the changes already enacted for 2027/28, as they apply to a UK-resident individual. The Autumn Budget on 28 October 2026 had not been delivered when this was checked.
Two bonds, one chapter of the Act
Both are single premium life assurance policies, or capital redemption policies, written by an insurer and taxed under Chapter 9 of Part 4 of the Income Tax (Trading and Other Income) Act 2005. The chargeable events are the same for both: death of the last life assured, maturity, full surrender, assignment for money or money's worth, and a part surrender that goes beyond the cumulative 5% allowance (ITTOIA 2005 s.484). The gain is worked out the same way, the 5% allowance under s.507 runs the same way, and segments work the same way.
What differs is the insurer. An onshore bond is issued by a UK life company, whose fund is within UK corporation tax. An offshore bond is issued by an insurer in Dublin, the Isle of Man, Guernsey or Luxembourg, whose fund is outside UK tax. HMRC's term for the second kind is a foreign policy (IPTM3700). The rest of this page follows from that.
Inside the fund: what the insurer pays
A UK life insurer is taxed on the policyholders' share of its income less expenses at the policyholders' rate of corporation tax. The Finance Act 2012 ties that rate to the basic rate of income tax, so it is 20% today (FA 2012 s.102). The Finance Act 2026 substitutes the new savings basic rate, which means 22% for the financial year beginning 1 April 2027. What the fund is taxed on matters as much as the rate. Interest and other loan relationship credits are taxed. Rental income is taxed. Chargeable gains are taxed, and holdings in collective investment schemes are treated as sold and rebought each year with the gain spread over several years (HMRC Life Assurance Manual, LAM03000). Dividends are exempt, as they are for any UK company. Indexation allowance for companies stopped at December 2017, so there is no inflation relief on growth after that date.
An offshore insurer pays no UK tax on the fund, and in the usual jurisdictions no local tax on it either. The only leakage is withholding tax deducted at source on some foreign dividends and interest, which the insurer cannot reclaim. For a portfolio of UK and Irish-domiciled funds that leakage is small; for a portfolio of US shares held directly it is real and should be in the comparison.
The practical effect is that an onshore bond holding a lot of bonds, cash or property funds pays tax on that income every year, while an offshore bond rolls it up gross. For a portfolio made of equities paying dividends, the onshore fund pays little, and the gap between the two narrows.
The 20% credit, and who it helps
Because the onshore fund has already paid tax, the policyholder is treated as having paid income tax at the basic rate on the gain (ITTOIA 2005 s.530). From 2027/28 the amount treated as paid moves to the savings basic rate of 22%. So a basic rate taxpayer pays nothing more. A higher rate taxpayer pays the difference, 20% today and again 20% from April 2027 (42 less 22). An additional rate taxpayer pays 25% (45 less 20 now, 47 less 22 later). The tax treated as paid cannot be repaid, so a non-taxpayer gets nothing back, and where part of the gain falls within the personal savings allowance or the starting rate for savings the credit simply goes unused (IPTM3810).
A foreign policy carries no credit (s.531), unless it was issued by a UK branch of a foreign insurer. The whole gain is taxed as savings income at your marginal rate. It is savings income, so it can use the personal allowance, the £5,000 starting rate for savings and the personal savings allowance if your other income leaves room for them. For someone with no other income at all, that is up to £18,570 of gain at nil in 2026/27.
A worked example for 2026/27
Take a higher rate taxpayer with £60,000 of salary and no other savings income, who cashes in a bond after ten years with a £40,000 gain. Her adjusted net income is £100,000, so the personal allowance is intact and her personal savings allowance is £500.
| Step | Offshore bond | Onshore bond, same gain | Onshore bond, gain after fund tax |
|---|---|---|---|
| Gain on the certificate | £40,000 | £40,000 | £32,000 |
| Tax in the fund (assumed 20% of the whole return) | nil | not shown | £8,000 |
| Gain within the £500 savings allowance | £500 at 0% | £500 at 0% | £500 at 0% |
| Rest of the gain at 40% | £39,500 × 40% = £15,800 | £15,800 | £31,500 × 40% = £12,600 |
| Top slicing relief over 10 years | £1,800 | £1,800 | £1,800 |
| Basic rate tax treated as paid | none | £8,000 | £6,400 |
| Personal tax to pay | £14,000 | £6,000 | £4,400 |
| Total tax, fund and personal | £14,000 (35% of £40,000) | n/a | £12,400 (31% of £40,000) |
The top slicing relief of £1,800 arises because the £500 savings allowance is set against each year's slice in the relief calculation, which is how HMRC's manual applies the relief from 2021/22 (IPTM3820); our top slicing relief calculator shows the working line by line. And the middle column is the one you usually see in adviser literature. It is not a fair comparison, because the onshore fund would not have produced the same £40,000. The right-hand column assumes the whole return was taxed at 20% inside the fund, which overstates the fund tax if the portfolio paid dividends, so the true onshore figure sits somewhere between the two.
From 6 April 2027 the offshore figure on the same facts becomes £14,700, because the higher rate on savings income rises to 42%. The onshore fund bears 22% instead of 20%, and the credit rises to 22%, so the personal bill on an onshore gain barely moves.
Top slicing: the same relief, one difference in the years
Top slicing relief applies to both. For a final event, the number of years is counted from the start of the policy for both. For an excess event on a part surrender, a UK policy counts from the later of the start and the last chargeable event, and since 6 April 2013 an offshore policy follows the same rule, with one adjustment: where a time apportionment reduction applies for years abroad, the count is reduced by the years of non-residence (IPTM3830; ITTOIA 2005 s.536). The relief itself is explained on our page on top slicing relief and chargeable event gains.
Who suits which
An onshore bond tends to suit someone who is a basic rate taxpayer now and expects to stay one, because the credit covers the whole bill. It also suits a portfolio built on dividend-paying equities, since the fund pays little tax on dividends, and a UK trust, because trustees of an onshore bond pay 25% on top of the credit while trustees of an offshore bond pay the full 45% trust rate with nothing to set against it (TSEM3210). That trust point reverses if the trustees will assign the bond out to a beneficiary who surrenders at a lower rate.
An offshore bond tends to suit a higher or additional rate taxpayer who expects to take the gain in a year of lower income, or to assign segments to family members who pay less tax, or to leave the UK. Years spent abroad reduce the gain under ITTOIA 2005 s.528 for both kinds of bond now, but only the offshore fund avoids paying tax during those years. It also suits portfolios heavy in interest-bearing assets, where an onshore fund would pay 20% every year on income the investor does not need yet, and investors who want a wider choice of underlying assets than UK insurers offer. Our page on how an offshore bond is taxed in the UK sets out the offshore mechanics in full.
One rule applies to both and catches the unwary: if the policyholder can pick the individual investments, the policy can be a personal portfolio bond and is taxed on a deemed 15% gain every year. Our page on the personal portfolio bond rules explains the boundary.
Death, assignment and trusts: mostly identical
The event rules do not depend on where the insurer sits. Death of the last life assured is a chargeable event for both, with the gain taxed as the deceased's income for the year of death on the surrender value just before death (IPTM3240). A gift of either bond is not a chargeable event; a sale is. Trustees are liable under the same rules for both (IPTM3250). The differences are the credit, which trustees of a foreign policy do not get, and two historical points: foreign life policies issued before 18 November 1983 and capital redemption policies issued before 23 February 1984 are treated as UK policies. Our page on assigning an offshore bond covers gifts, sales and trusts in detail.
Reporting: two different pages of the return
A gain on a UK policy is reported on the additional information pages, SA101; a gain on a foreign policy on the foreign pages, SA106. The figures come from the insurer's chargeable event certificate, and our page on reading a chargeable event certificate goes through it line by line.
Who issues what
Most of the large groups offer both and keep them in separate companies. Prudential's UK bonds are issued by The Prudential Assurance Company Limited and its international bonds by Prudential International Assurance plc in Dublin. Canada Life's international bonds come from Canada Life International Limited in the Isle of Man and Canada Life International Assurance (Ireland) DAC in Dublin; the group agreed in December 2024 to transfer its UK onshore bond book to Chesnara. Quilter's onshore Collective Investment Bond is issued by Quilter Life & Pensions Limited; the former Quilter International business was sold to Utmost in 2021 and now trades as Utmost International. RL360 in the Isle of Man issues offshore bonds only. Published minimums for the offshore products we checked run from £20,000 (Prudential International Investment Bond, RL360 Oracle) to £50,000 (Canada Life Premiere Account); a bespoke policy of the kind described on this site starts a long way above that.
Where a bespoke policy fits
Private placement life insurance is an offshore bond with the portfolio managed to order rather than chosen from a fund list. Everything above about foreign policies applies to it: no tax in the fund, no credit, the whole gain at your marginal rate, time apportionment for years abroad, and the personal portfolio bond rules if the investor rather than a manager picks the assets. Where it differs from a retail offshore bond is in the charges, which are negotiated rather than published, and in the range of assets. Our UK guide to offshore bonds and PPLI is the starting point for that comparison.
Questions about onshore and offshore bonds
What is the difference between an onshore and an offshore bond?
An onshore bond is issued by a UK insurer whose fund pays corporation tax on its income and gains at a rate tied to the basic rate, and the investor is treated as having paid basic rate tax on the gain. An offshore bond is issued by an insurer outside the UK, pays no tax inside the fund, and the investor pays income tax on the whole gain when a chargeable event happens. The chargeable event rules, the 5% allowance and top slicing relief apply to both.
Is an onshore bond tax-free for a basic rate taxpayer?
Not tax-free, but there is usually nothing more to pay. The fund has borne tax at 20% (22% from April 2027) and the policyholder is treated as having paid basic rate tax on the gain. A basic rate taxpayer therefore pays no further income tax, provided the gain does not push them into the higher rate band after top slicing. The tax treated as paid cannot be refunded to a non-taxpayer.
Which pays more tax, an onshore or an offshore bond?
On the gain itself, the offshore bond: 40% or 45% of the gain for a higher or additional rate taxpayer against 20% or 25% on an onshore gain, after the credit. Measured on the whole return, the onshore fund has already paid tax before the gain is struck. In the example on this page the total comes to 31% of the return onshore against 35% offshore for a higher rate taxpayer; before allowances and top slicing relief the comparison is roughly 36% against 40%, and the onshore figure is lower still where the fund held dividend-paying shares. The offshore bond comes out ahead when the gain is taken at a lower rate than the investor pays today.
Do onshore bonds get a 20% tax credit?
Yes. Under ITTOIA 2005 s.530 the policyholder is treated as having paid income tax at the basic rate on the gain, 20% in 2026/27 and 22% from 6 April 2027. It is not repayable, and it does not apply to a foreign policy unless the policy was issued by a UK branch of a foreign insurer.
Can I move from an onshore bond to an offshore bond without tax?
No. A bond is a contract with one insurer, so moving to another insurer means surrendering the first policy, which is a chargeable event, and starting a new one. Switching funds inside the same bond is not an event. Our page on switching funds, managers or insurer inside a bond explains what can and cannot be done.
Are offshore bonds protected by the FSCS?
Most are not. The Financial Services Compensation Scheme does not cover policies issued by Isle of Man, Guernsey or Jersey insurers, which have their own schemes, and the position for Irish and Luxembourg insurers depends on when and how the policy was written. Our page on what happens if an offshore life insurer fails sets out the position by jurisdiction.
What changes for bonds in April 2027?
The Finance Act 2026 sets separate savings rates of 22%, 42% and 47% from 6 April 2027, which apply to gains on both kinds of bond. The policyholders' rate on an onshore fund moves to 22%, and the tax treated as paid on an onshore gain also moves to 22%, so the net onshore cost for a higher or additional rate taxpayer stays at 20 or 25 points while the offshore cost rises by two points at each rate.
PPLI.com is not authorised by the Financial Conduct Authority and does not give personal advice. This is general information about UK law, not an invitation or inducement to enter into any insurance or investment contract. Policies issued by insurers outside the UK are not protected by the Financial Services Compensation Scheme.
Sources and authorities
Read as at 19 October 2026 for the tax year 2026/27. Rates for 2027/28 are as enacted in the Finance Act 2026; the Autumn Budget on 28 October 2026 may change them. The worked example is hypothetical and shows every step.
- ITTOIA 2005 s.484: chargeable events. s.507: the 5% allowance. s.528: reduction for years of non-residence. s.530: tax treated as paid on UK policies. s.536: years for top slicing.
- Finance Act 2012 s.102: the policyholders' rate of corporation tax. Finance Act 2026, ss.5 to 7 and Schedule 1: savings rates of 22%, 42% and 47% and the move of the policyholders' rate and the credit to the savings basic rate from 2027/28.
- HMRC Insurance Policyholder Taxation Manual: IPTM3700 (foreign policies), IPTM3810 (tax treated as paid), IPTM3830 (number of years), IPTM3240 (death), IPTM3250 (trustees).
- HMRC Life Assurance Manual, LAM03000: what a UK life fund is taxed on. HMRC Trusts, Settlements and Estates Manual, TSEM3210: trustees' rates on bond gains.
- HMRC helpsheets HS320 and HS321; SA101 and SA106 notes for 2026.
- Insurer documents (secondary sources, read for product facts only): Quilter, Onshore or offshore bonds sales aid; M&G, onshore vs offshore bonds; Prudential International, product charge tables, January 2026; RL360, Oracle product guide; Canada Life, Premiere Account product details and sale of onshore bond business; Utmost, completion of the Quilter International acquisition.
Last updated: 19 October 2026. See our editorial standards for how articles are researched and corrected.
Eldar leads PPLI.com’s strategy, research and partnerships. He acquired PPLI.com in 2020 and has worked on private placement life insurance since then.
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