Lycetts Financial Services

Investment Bonds

Investment bonds are subject to a number of different taxation rules, compared to other collective investments. Whilst they differ from other collective investments, the funds they operate in are almost identical to those you might buy for an ISA, pension, OEIC or unit trust. Read on for Lycetts expert advice about this type of investment.

Onshore investment bonds (including with profit bonds) pay all basic rate tax and capital gains tax due on their investor’s behalf. Investment bonds also have a unique feature in that, under current rules, you can choose to withdraw up to 5% of your initial investment each year without the need to pay any income tax straight away.

 

One of the reasons investment bonds have been such a popular tax planning tool for investors is that withdrawals of 5% p.a. can be made every year for up to 20 years. If you take the 5% withdrawals, it should be noted that the tax is only deferred. If you don’t plan carefully you may incur a larger tax bill later on.

 

Offshore bonds have the majority of the characteristics of onshore bonds, although the key difference is that they are not based/domiciled in the UK and the tax treatment and investment choices available are different to its onshore counterpart. Typically, offshore bonds are not taxed at source and, as such, the fund benefits from what is often referred to as “gross roll-up”.

 

However, when the bond is eventually encashed it is taxed in the country where the person is resident for tax purposes. So, for a person resident and domiciled in the UK, they would pay UK tax on the whole of any gain (non UK domiciled people could still pay UK tax if the money is remitted here).

 

Typical features of investment bonds include:

 

  • Wide range of investment funds available, which can be switched without triggering a chargeable event for either income tax or capital gains tax.
  • A deferred annual withdrawal of 5% without any immediate liability to tax.
  • Investment bonds can include a very small amount of life cover; typically 101% of the value of the bond on death.

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Christopher Booth

Newcastle

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