Investment Bonds

Investment Bonds - Bond Investment Factfile

Assigning Bonds

Unit Linked Investment Bonds

Lump sum investments: Yes

Regular premiums allowed: No

Flexible payments allowed (stop/start/additional/increase/decrease): Yes

Investment Bond - Investment Risk Profiles Available:

• No Risk funds available - only in a highly specialised personalised bond
• Low Risk funds available
• Medium Risk funds available
• Medium to high risk funds available
• High risk funds available

Availability:  Available as UK based Onshore Investment Bond and Offshore 'Tax Haven' Investment Bond

Changing funds and risk profile allowed: Yes

Moving to another company allowed: Yes

Life Insurance Included: Yes

Investment Bond Personal Tax Benefits:

• No personal liability to taxes for basic rate tax payers and non tax payers
• Onshore Bonds investment fund pays taxes before you receive returns
• Offshore Bonds investment fund have limited or no taxes depending upon which territory
• Offshore bonds, UK resident potentially taxable when surrendered or partially surrendered or 'income' drawn
• Onshore and Offshore: Up to 5% per year can be withdrawn with a fully deferred and postponed tax liability for higher tax payers for up to 20 years
• If the higher rate taxpayer subsequently becomes a basic rate tax payer or non tax payer in the future any deferred or postponed tax liability is potentially wiped out
• Higher withdrawals over and above 5% per year can be taken with no liability to tax for basic rate tax payers and non tax payers (onshore bonds only)
• At maturity, any gain is added to normal income to see if this takes you into the higher rate tax bracket and if so marginal taxes become due (onshore bonds only)
• Withdrawals will not affect or reduce enhanced tax allowances for pensioners

Can be held inside Trust: Yes

Investment Bond Suitable For:

• Adults
• Business (offshore bonds only not UK Bonds)
• Basic Rate Tax Payers
• High Rate Taxpayers
• Trusts

Insolvency Compensation Limits:

• UK - Insurance Company Funds - 90% of total funds invested.  No Limit.
• Offshore - depends upon territory but many have similar provisions to UK

Brief Description:  Investment Bond

Unit linked investment bonds are a home for your money that offer potentially greater returns than a bank or building society.  An investment bond offers you a framework so you can tailor it to your needs in respect of how much you want to invest, where you want to invest it and with the degree of risk that you are comfortable with.  These investments allow you access to a wide range of funds in terms of different markets, different levels of risk and investing in different investments such as shares, property and cash.  Some funds that are offered through investment bonds are not available as direct investments.  Investment bonds can be suitable for all types of investors because they are so flexible.  They can also be suitable for higher rate taxpayers because of the way some of the tax can be deferred until the investment is surrendered.  Read the section on Investment Bond Taxation.  For more on investment bonds contact our advisers.

Investment Bond Taxation

Investment Bond Tax

Investment Insurance Bond Taxation and Top Slicing

• The holder of the investment bond can switch from one fund to another with no personal capital gains tax liability.
• Onshore funds - the underlying funds are taxed at source on profits as it is the insurance company that pays corporation tax, which is still lower than a higher rate tax payer would have to pay on direct investments. 
• Offshore funds have limited or no taxes deducted but you are taxed if UK resident when surrendered or partially surrendered, you may or may not be taxed if you are tax resident in another territory
• Because these investments are taxed at source on the underlying UK funds, they are not suitable for non tax payers.  Offshore funds can be suitable for all.

Great for Pensioners: Age Allowance Unaffected

Investment income and pension income above age allowance limits will reduce your higher personal tax allowance as a pensioner.  Investment bonds are suitable for pensioners because the higher age tax allowance for people over the age of 65 is not affected by withdrawals from investment bonds.

Great For Basic rate tax payers - No tax:

• There is no further liability to tax on investment growth and or any 'income' withdrawals taken from the fund.

Great For Higher rate tax payers - Tax Postponed or Even Avoided?

• UK Investment bonds are great for tax deferral.  If you are a higher rate tax payer and will be a basic rate tax payer when the bond is surrendered it may mean that there will be no further tax to pay.
• Offshore Investment bonds are great for tax deferral.  If you are higher rate tax payer and will not be UK resident when the bond is surrendered it may mean that there will be no further tax to pay.
• Under current rules a figure up to 5% of the original capital can be withdrawn each year for 20 years with no immediate tax to pay.  Tax is deferred until full surrender.
• This allowance is cumulative so if nothing is taken for five years, 25% can be withdrawn in one go with no immediate liability to tax.  These withdrawals are deemed as a return of capital and any tax is deferred.
• If and when you fully surrender the investment, you are then a UK basic rate taxpayer for example.  you have retired, and the profit per year (top slice) when added to your income does not take you into a higher rate tax bracket, there is no personal liability to tax.
• Result:  You invested as a UK higher rate tax payer.  You withdrew 5% per year (or rolled it up) tax deferred and when you encashed it you were a basic rate taxpayer and the top slice calculation still kept you in the basic rate tax bracket which means no tax.

Top Slicing Explained: Will I pay more tax?

This is a term used to determine whether further tax is due for UK residents once an investment bond has been surrendered.

• The gain on the policy (surrender value less original investment) is calculated.
• This gain is split equally over the complete years the investment has been in force.
• This gives what is termed the 'average gain'.
• The average gain is added to your taxable income in the year of surrender.
• If the combined taxable income and average gain takes you into the higher rate tax bracket, the proportion of any gain above the threshold is the investment bond's taxable slice - the 'Top Slice' 
• The Top Slice is multiplied by the complete years the investment has been in force - Taxable Gain
• Tax is due on this taxable gain at 20% for higher rate tax payers

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