Chapters Financial News

Investment bonds

Most readers of our blog page will be aware that we are advocates of using annual tax allowances through the tax years where possible and prudent. 

The obvious allowances are the annual ISA, capital gains and gifting allowances that many use to alleviate tax burdens in the future. Because there are limits on these annual allowances, the gradual effect of using these can feel slow to some, but nevertheless effective. 

In addition, and based on current legislation, a saver (basic rate) can receive gross interest of £1,000 pa and pay no tax. Therefore, spreading interest-earning savings between partners/spouses can also be an effective tax saving option. Noting the higher rates of interest currently available, this position might become more important in the current economic climate. Another tax efficient alternative is National Savings & Investments (NS&I) Premium Bonds with a maximum holding of £50,000 and offering tax free winnings (of course not guaranteed, and no return in the first calendar month). 

However, when considering investment funds outside pensions, and once the options noted above have been used, are there any other options that might be worthwhile considering? 

One notable option that some might find attractive from a tax perspective is an investment bond. But what is this type of arrangement? 

Investment bonds have their own distinctive structure and taxation treatment, as a whole of life policy funded by a single premium or one or more single premiums. There are no legislative limits on the amount that can be invested into an investment bond, although individual providers are likely to impose upper (and lower) limits. The bond can be held onshore or offshore, and in this blog, we focus on onshore bond arrangements. 

The bond has a life or lives assured and is normally segmented to give flexibility in the way future funds can be withdrawn. It is possible to take withdrawals of up to 5% pa of the original investment amount over 20 years with no immediate tax liability, and these 5% allowances are cumulative. 

The withdrawals are tax-deferred, rather than tax-free, and therefore a liability to income tax may arise in the future when the bond is partly or wholly encashed. An onshore investment bond is deemed to pay income tax at 20% (notionally basic rate), and the bondholder only pays tax on bond income and gains when certain taxable events happen, known as chargeable events. For a basic rate taxpayer, a chargeable gain on encashment can be spread across policy years through top-slicing relief. This can reduce or negate the tax on gains where the full gain would take an individual into the higher or additional rate tax bracket. 

Deferment of tax and simpler administration for the bondholder can make an investment bond attractive to individuals looking for a tax-efficient 'income', or to pass on wealth. As noted above, the facility to withdraw up to 5% pa of the investment amount could be a helpful and predictable addition to household revenue in the future. The 5% withdrawals taken do not need to be declared on any tax return as long as they stay within the limits. 

If withdrawals above the 5% (cumulative) limit occur, or full encashment of a segment or segments is made, any gain would be taxed at your highest marginal rate, noting that a notional 20% tax is already deemed to have been paid. 

There is a growing number of investment bond providers, and it is good to see market competition returning to this area, which was very popular a decade or so ago. Investment bonds are now returning as a possible investment option following the reduction in annual tax allowances (such as capital gains) elsewhere. 

Summary

Getting the most from your savings is important, as is the option to use your annual allowances. Looking at all options, including the potential option of offshore investment bonds, is part of the individual financial planning process and we are ready to help based on your needs and objectives. 

Please do speak to the team at Chapters Financial about your investment planning needs and objectives. 

No individual advice is provided in the course of this blog.

Keith Churchouse FPFS 
Director 
CFP Chartered FCSI
Chartered Financial Planner  

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.