Many of you will be aware that after you have used up your tax efficient National Savings, ISA, Friendly Society and Pension allowances, you have few options for avoiding tax on savings. You even get taxed on the interest in your deposit account before you receive it! This is where insurance bonds come into their own.
Investors in Life Insurance Single Premium Investment bonds are, under current rules, allowed to withdraw an 'income' of up to 5% per year with no liability to personal income tax for 20 years. After 20 years, the remaining investment is deemed as the capital growth and added to your normal personal income. The 5% 'income' is not really income but is actually treated as a return of capital over 20 years rather than real income and therefore tax is deferred. 20 years at 5% is 100% of your original capital.
You do not have to take an income if you do not wish to and you can generally cash in your investment at any time. You can also delay taking the 'income' if you wish and the 5%per year accumulates. You can even take more than 5% 'income' - but there would be a tax charge on the excess above 5% if you are a higher rate tax payer.
In 20 years time, if you are a basic rate or lower tax payer you may have no further liability to income tax. If you are a higher rate payer or the addition of the capital growth to your income takes you into the higher rate tax bracket then you may be required to pay additional tax. This tax deferral rule is a gift for people who have used up all their tax efficient yearly savings allowances such as ISAs, and Friendly Society Plans. It is particularly attractive to people who are basic and higher rate tax payers now and wish to receive a tax free 'income'. Particularly if you are likely to be a basic rate tax payer in 20 years e.g. you have retired and have a lower income- there may then by no personal liability to tax.
Great for the over 65s. These bonds can also be fantastic for people aged 65 or over who get some or all of their personal allowance taken away because their income is above £17,900 (this is the age allowance income threshold). The 'income' taken from these bonds does not count towards your real income and does not have to be declared on any tax return. By investing in bonds you could benefit from a more tax efficient income.
Tax Deferral Break on Insurance Bonds to go? The Chancellor indicated in his Pre-Budget speech last November that he is looking at this type of investment plan closely and may withdraw the loophole as soon as the coming budget in March! The Association of British Insurers (ABI) is currently lobbying to try and retain this tax deferral rule that has been around since 1968. In simple terms, if you want to take advantage of this opportunity then perhaps you need to take action sooner rather than later.
Learn more about bonds in the Savings Adviser.com.
Contact us for urgent advice on this sector of investment.