A UK (onshore) bond is issued by an insurer that pays UK tax on the investment return it earns for policyholders, so when the policyholder makes a gain they are treated as having already paid basic rate tax on it, 20% for 2026 to 2027, although that credit is never repaid. An offshore bond is issued by an insurer outside the UK tax system, so the fund grows without UK tax, but the whole gain is then taxed at the policyholder’s own rates with no credit. Onshore tends to suit people who will be basic or higher rate taxpayers when they cash in; offshore tends to suit people who expect low income, unused allowances or time abroad.

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Why are onshore and offshore bonds taxed differently?

The difference starts with the insurer. HMRC explains at IPTM3810 that basic rate tax is treated as paid on a policyholder’s gain only when the insurer is taxed on the investment return accruing for policyholders under the I minus E system. A foreign insurer is outside that system (IPTM3720), and IPTM3330 notes that a UK insurer writing overseas life assurance business likewise does not account for tax on policyholders’ share of the return. Money inside an offshore bond therefore builds up without UK tax being deducted along the way, often called gross roll up.

A foreign policy, for these rules, is broadly a life policy issued by an insurer that is not UK resident and made, or varied to increase benefits or extend the term, on or after 18 November 1983 (IPTM3330). Policies issued through a UK branch of a foreign insurer are treated as UK policies and do get the credit (IPTM3810). Ask the insurer which applies.

How does the credit on an onshore bond work?

Section 530 of the Income Tax (Trading and Other Income) Act 2005 treats an individual or trustees liable on a gain as having paid income tax on it at the basic rate. The gain is not grossed up: IPTM3800 says a £1,000 gain is included in income as £1,000, with £200 treated as paid. The credit is not repayable in any circumstances. IPTM3810 adds that it is still treated as paid where part of the gain falls in the starting rate for savings or the Personal Savings Allowance nil rate band, so those allowances bring no refund.

The practical result for 2026 to 2027 is:

  • a gain that stays within the basic rate band costs nothing more;
  • a gain taxed at 40% costs a further 20% of the slice in that band;
  • a gain taxed at 45% costs a further 25% of the slice in that band;
  • a non taxpayer gets nothing back for the tax suffered inside the fund.

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How is an offshore bond gain taxed?

The full gain is savings income under section 18 of the Income Tax Act 2007 and is taxed at the policyholder’s rates with nothing treated as paid (IPTM3720). Because it is savings income, it can be covered by any unused Personal Allowance, the starting rate for savings of up to £5,000 and the Personal Savings Allowance of £1,000 for basic rate taxpayers or £500 for higher rate taxpayers.

Top slicing relief is available to individuals on both types. IPTM3830 explains that for a foreign policy basic rate tax treated as paid is deducted from both sides of the relief calculation, so the relief is worked out the same way whichever type is held. Offshore gains are reported in the foreign section of the return, and overseas insurers on policies taken out from 6 April 2000 have the same duty as UK insurers to issue chargeable event certificates (IPTM3210).

How do the two compare side by side?

Feature Onshore bond Offshore bond
UK tax on the fund’s return Paid by the insurer None
Tax treated as paid on gains Basic rate, not repayable None
Allowances against the gain Reduce tax, but no refund of credit Fully usable
Can it be a qualifying policy? Possible Not usually (IPTM3710)
Time apportionment relief Policies issued, varied or assigned from 6 April 2013 All foreign policies
Personal portfolio bond rules Apply Apply

A worked comparison

Illustration only. The table shows the tax on a £30,000 gain on full surrender in 2026 to 2027, ignoring top slicing relief. It compares tax on the same gain; in reality the onshore fund has already borne the insurer’s tax, so the same investment would usually show a smaller gain onshore.

Policyholder Onshore Offshore
No other income Nil to pay; liability of £2,286 covered by the £6,000 treated as paid, no refund £12,570 Personal Allowance, £5,000 starting rate, £1,000 Personal Savings Allowance, £11,430 at 20%: £2,286
£20,000 other income, gain within basic rate band Nil £29,000 at 20% after £1,000 Personal Savings Allowance: £5,800
Higher rate, whole gain in higher rate band £12,000 less £6,000: £6,000 £12,000

The figures use the 2026 to 2027 Personal Allowance of £12,570, basic rate band of £37,700 and 40% higher rate. The higher rate example also ignores the £500 Personal Savings Allowance.

Which suits which taxpayer?

  • Basic rate taxpayers who expect to stay that way. The onshore credit usually means no further tax on surrender, while an offshore gain would be taxed at 20% after allowances.
  • Higher and additional rate taxpayers now, lower rate later. Offshore roll up defers all UK tax, and the gain can be timed for a year of low income, such as retirement, or moved by gift to a spouse or adult child with spare allowances; see assigning a bond.
  • People who will be non taxpayers when they cash in. Offshore lets allowances absorb the gain, whereas the tax suffered inside an onshore fund is lost.
  • People who have lived, or will live, abroad. Every foreign policy qualifies for time apportionment relief; older UK policies do not unless varied or assigned since 5 April 2013.
  • Companies. The comparison above does not apply, because a company holding a bond is taxed under the loan relationships rules instead (IPTM3900).

What changes from April 2027?

The government has announced savings rates of 22%, 42% and 47% for 2027 to 2028, applying across the UK. Finance Act 2026 amends section 530 so that, from 2027 to 2028, the tax treated as paid is at the savings basic rate. On the announced rates a higher rate taxpayer with an onshore bond would still pay a further 20% of the gain, while the same gain on an offshore bond would bear 42%. See savings income tax rates from April 2027.

What mistakes are common?

  • Thinking an offshore bond is free of UK tax. It defers tax; the gain is taxed in full on a UK resident.
  • Treating a policy from a UK branch of a foreign insurer as offshore.
  • Expecting the onshore credit to be repaid to a non taxpayer.
  • Choosing an offshore bond with a wide investment choice without checking the personal portfolio bond rules.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.