Posted on 25/04/2024 by Mark Dunning
An Investment Bond is a single premium (non-qualifying – meaning potentially taxable) life insurance policy that can be used to hold investments.
Holding shares and dividends in Collective Investments Accounts (CIAs), General Investment Accounts (GIAs), Unit Trusts, Open-Ended Investment Companies (OEICS) and Investment Trusts could now be seen from a tax-efficient perspective as less attractive, in comparison, than before.
For example, the capital gains tax annual allowance has reduced from £12,300 (2022/23) to £6,000 (2023/24) and to now to just £3,000 (2024/25). The dividend allowance of £5,000 in (2016/17) reduced to £2,000 (2018/19 to 2022/23) then to £1,000 (2023/24) and now is only £500 (2024/25).
An investment bond holder may pay income tax on gains when certain taxable events occur – these are known as chargeable events. As these events can be created/not created by the investors’ actions, it can give more control over who pays tax and when. As a result, investment bonds may now have become the more attractive option.
An investment bond is made up of ‘segments’ e.g. a £100,000 bond may be split into 100 segments of £1,000 each. With a collective, unit trust or OEIC, when you transfer or give away your shares to anyone other than your spouse or civil partner, you may be liable to capital gains tax on transfer. However, with a bond, you can assign ownership of segments and even gift your entire bond and you are potentially not liable to tax on the transfer i.e. you can assign ownership of the bond or any number of the bond’s segments. This can present positive estate mitigation, tax planning and school, university, or other funding opportunities.
Investment bonds can he held onshore or offshore. Onshore bonds are deemed to be 'basic rate tax paid' whereas offshore bonds benefit from a process known as ‘gross roll-up’ whereby they are not taxed whilst they remain invested. Many will view the concept of offshore investing with mixed feelings. Some will think that investing offshore has glamorous connotations, while others could view this sort of investing with scepticism and that of tax avoidance.
Offshore bonds can be more expensive than their onshore counterparts and are also more regulated. Many offshore bonds are typically provided by large mainstream UK insurance companies who volunteer themselves and their offshore bonds into the Financial Services Compensation Scheme (FSCS). This means that policyholders are then offered the same regulatory protection as they are with an onshore bond. Being overseen by the UK regulator, investors should be somewhat re-assured that their offshore investments are under the beady eye of the Financial Conduct Authority (FCA). Offshore bonds based outside of the UK can typically be found in places like Dublin, the Isle of Man or Jersey.
Unlike CIAs, GIAs and Unit Trusts etc that have a maximum £85,000 compensation limit if the investment firm becomes insolvent, insurance investments bonds have 100% compensation protection with no upper limit as they are whole of life insurance-based investments.
Investors are permitted to withdraw (known as a return of their capital) up to 5% per annum of their original capital investment amount without any immediate income tax liability. This means that over a 20-year period, you can have a return of capital of up to 5% each year (at year 20 that would constitute 100% of the original investment – 20 years times 5% is 100%) without any tax due.
You can even defer the 5% per annum withdrawals, for example, with no withdrawals for 5 years means that in year 6, you could withdraw 30% of the original investment (5 years deferred 5% is 25% plus 5% for year 6). After this, all that remains are the gains i.e. growth which may then be subject to income tax at the investors marginal rate.
This allows chargeable gains to be spread over the number of complete years the bond has been in force to recognise the fact that the chargeable gain has accrued over the whole period the bond was in force and not merely in the tax year in which tax is to be assessed on the chargeable gain.
This could help to mitigate the tax liability created by a chargeable event.
Investment bonds are currently not included in the capital means test for payment of social care fees provided you are not taking regular withdrawals. This is specifically detailed in the Government’s Charging for Residential Accommodation Guide (CRAG) issued to all local authorities specifying how each local authority should charge for residential care.
With recent budget changes, investment bonds may now be a more attractive option for an investor – certainly more than they have been in recent years. There still remains multiple tax wrappers available for investment and it’s not a case of one-size-fits-all so speaking to an adviser could make all the difference for you and your family.
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