Firstly, what is an investment bond?
An investment bond provides a flexible method of investing your money, with the potential for growth over the medium to long term. It is designed to allow your capital to grow and give you the ability to take regular, tax-efficient withdrawals is required.
An investment bond offers the opportunity to take advantage of several tax benefits, including arrangements which can help to reduce your inheritance tax liability.
Investment bonds are life insurance policies which allow individuals, companies and trusts to invest a lump sum into a variety of investments. You can also pay additional amounts into the investment bond if you wish to do so. Whilst they are technically life insurance policies, the level of life cover is minimal and they are mainly used as a vehicle to invest money.
Now more specifically, what is an Onshore Investment Bond?
An Onshore Bond is an investment bond set up by a UK life insurance company and is set up in the UK. The below sections confirm the benefits and tax treatment of Onshore Investment Bonds.
What are the benefits of an Onshore Bond?
An Onshore Bond offers individuals, companies and trusts the following benefits:
- Control of Outcomes: investment bonds have no maturity date, allowing customers to decide when to sell their investment. Although the bond will pay out on the death of the life assured, it is possible to have multiple lives assured meaning the bond will not end prematurely.
- Convenience and Choice: the ability to choose from a wide variety of underlying investment funds, which can be changed with no tax or reporting considerations.
- Administration Simplicity: all transactions are consolidated and reported in a single statement and valuation.
- Inheritance Tax Planning Options: bonds can be used in conjunction with a wide variety of trusts. To supplement income, bonds offer tax-efficient withdrawals with flexibility on how this is taken.
- Tax Planning: the ability to time when tax is payable, especially is multiple lives assured are used
What is the taxation of an Onshore Investment Bond?
For a UK individual, the personal taxation implications of an Onshore Investment Bonds is as follows:
- You will not normally have to pay any basic rate income tax or capital gains tax in connection with your bond. This is because the underlying investments pay tax and whilst the exact rate of tax paid within the fund will vary, the bondholder is deemed to have paid rate at a rate equal to 20% (basic rate tax).
- You may withdraw (including adviser fees) up to 5% of your initial investment (and any subsequent investments) each year without any immediate tax payable. This allowance is cumulative and any unused allowance is carried forward to future years. There is no immediate tax liability until 100% of the initial and any subsequent investment has been utilised. For example, if you were to take automatic withdrawals of 5% per year, you could do this for 20 years with no immediate income tax liability.
- If you withdraw (including adviser fees) more than 5% a year, or more than you have invested, you may be liable to income tax on any amount above 5%.
- When you cash in your bond, you may have to pay income tax on any gain that you have made, taking into account any withdrawals (including adviser charges)
- On the death of the life assured (or the death of the last life assured if multiple lives assured), your bond is treated for tax purposes as though you had fully cashed it in just before their death.
- If you are a higher rate or additional rate taxpayer, or if the gain puts you into these tax bands, then you may incur an income tax liability on any gain that you make. The rate of tax payable will be based on the difference between your tax rate and the basic rate of income tax.
Tax of Investment Bonds held under trust is a complex area and therefore, we strongly recommend that you seek financial advice before making any decisions regarding trusts.
Who could an Onshore Bond be suitable for?
An onshore investment bond could potentially be suitable for:
- A UK individual over the age of 18, or a company or trust
- An individual using the onshore bond as part of their tax planning; either because they have used up other allowances or as part of inheritance tax planning
- Someone looking to take tax-efficient regular withdrawals from their investment, such as a retiree
Who would an Onshore Bond typically not be suitable for?
An onshore investment bond is typically not suitable for:
- An individual who has no other savings or investments
- An individual who has not used their other available tax allowances, such as an ISA
- An individual who would need access to your capital in the short-term
- An individual who is not willing and able to accept the risk of potential investment losses
Tax treatment varies according to individual circumstances and is subject to change.
The Financial Conduct Authority do not regulate tax planning and trusts.