Investment Bond

If you’ve already used up your ISA (Individual Savings Account) subscription allowance for the current tax year, you’ve fully funded your pension, and you’re a higher rate tax-payer but believe you’ll become a basic rate tax-payer in the future, or you’re a trustee, and you want to invest in a wrapper which automatically rolls up dividends and gains rather than paying them out, then yes.

Bear in mind that the profits you earn on investments in an ISA or pension are free from personal taxes, whereas, in an investment bond, whilst income and gains from the underlying assets can roll up inside the bond wrapper if you take any withdrawals, you may be assessed for Income Tax.

The value of an investment and any income from it may fall and rise, and you may not get back the total amount you invest.

You can invest in investment funds in stocks and shares, fixed-interest securities or cash in an investment bond. Whilst profits aren’t guaranteed, the underlying investments can grow the value of an investment bond over the medium to long term at a higher rate than the rate of inflation or the rate or interest rate generally available on cash deposits.

The value of an investment and any income from it may fall and rise, and you may not get back the total amount you invest.

There’s no personal liability to Capital Gains Tax or Basic Rate Income Tax on the gains within an Investment Bond.

A tax liability can occur when a gain arises following a ‘Chargeable Event’, which is defined as either a withdrawal of more than 5% (the tax-deferred allowance) of the amount initially invested, the full or partial surrender of the bond, the death of the life assured, the maturity of the investment bond or its assignment to a third-party.

A chargeable gain is treated as income and assessable for Income Tax. If a gain pushes your total income into the higher or additional rate tax bands, you will pay Income Tax on at least part of the gain.

If you withdraw money from a bond, your gain and the associated tax liability may be mitigated using your tax-deferred allowances, top-slicing, encashment over several policy years, or partial encashment across all segments vs the full encashment of individual segments.

Your entitlement to personal allowances and benefits such as Working Tax Credit can be affected if you earn a Chargeable Event gain. Hence it would be best if you took professional advice before withdrawing.

Onshore providers pay a ‘Life Fund Tax’, equivalent to the Basic Rate of Income Tax, on any income or gains earned on your Investment Bond’s investment funds. The provider pre-pays this tax and is not reclaimable, so an onshore Investment Bond is not generally appropriate for a non-taxpayer.

Note that this tax treatment depends on your circumstances and may be subject to change in future.

Offshore is a common term for a range of locations where companies could offer customers returns on their investments free from tax, including the Channel Islands, the Isle of Man and Dublin.

The tax treatment of an Offshore Investment Bond varies from one type of investment to another and from one market location to another. Offshore Investment Bonds are similar to UK investment bonds, but there’s one main difference.

For an Onshore Bond, tax is payable on the gains earned in the underlying investment funds at a rate equivalent to the basic rate of Income Tax. For an Offshore Bond, no Income or Capital Gains Tax is paid on profits from the underlying investments, although there can be an element of Withholding Tax that can’t be recovered. Withholding Tax is deducted from interest and dividends received by investment funds.

The preferential tax treatment of investments in an Offshore Bond means they can grow faster than an Onshore Bond. If you earn a Chargeable Event gain, Income Tax at the basic, higher and additional rates may be payable.

So that you know, this tax treatment depends on your circumstances and may be subject to change in future.