What are Investment Bonds?

IN THE final part of my series of articles on investment tax wrappers I’m going to look at Investment Bonds. We come across Investment Bonds quite regularly with clients who already have them but from our point of view they’re not often our first line of recommendation. The reason for this is that when you look at your ISA allowance and your Capital Gains Tax (CGT) exemptions many people would be better served in ISAs and General Investment Accounts (GIA), which we’ve covered over the past couple of weeks. An Investment Bond isn’t always the most tax efficient vehicle for people because if you have an onshore Investment Bond that underlying investment fund will be liable for Corporation Tax at source. On a like-for-like basis, if I’ve got Fund A in my onshore Investment Bond and Fund A in my ISA, although the fund’s performance will be the same because the underlying assets changes in value at the same point, the one in the ISA will grow quicker because no Corporation Tax is being deducted. Investment Bonds can be quite convenient for people who are basic rate taxpayers, who have always been basic rate taxpayers and who are only ever going to be basic rate taxpayers because you haven’t got to do a complicated tax return when you want to get rid of them as there’s usually no tax to pay on encashment. But if you’re a non-taxpayer you can’t claim any Corporate Tax back and if you’re a higher rate taxpayer you’re going to have to pay some more tax when you encash it, meaning you might be better off with an offshore bond that isn’t taxed at source. Investment Bonds do have their uses for people considering an investment in trust. The reason for this is that bonds are usually deemed to be single premium life assurance policies and therefore exempt from CGT. Because a bond doesn’t produce any natural income there is no annual income tax to pay and as a trustee one of the things you don’t want to get involved in every year is doing a tax return for the trust. It avoids spending time, effort and inconvenience on filling in tax returns every year or paying an accountant to do it for you. Equally, if you’re a wealthy individual who’s unsure of your future tax position we might mix together ISAs, pensions, GIAs and Investment Bonds. Doing this means that when you get to the point where you need to take money out you have several different pots that you can go to and each of those pots will have a different tax treatment. As a result, it gives you more flexibility in the future. For example, if my problem in one year is CGT because I’ve sold a second property, I don’t want to be drawing on my GIA but I might be quite happy to draw on my offshore investment bonds. Equally, if I’m a higher rate taxpayer because I’ve earned a large amount of money in that tax year, but I haven’t used my CGT exemptions, I might want to draw money from my GIA. There are definitely some groups of people that Investment Bonds work really well for but if you are a private individual and not a trustee you might just want to consider whether an ISA or a GIA is more suitable for you first. If you’ve got an Investment Bond maybe it’s time to have it reviewed to see whether it’s still the most appropriate tax wrapper for you? TIM EMBLETON Got a financial question you want Tim to answer? You can email him at tim@tfp.limited. Tax treatment is dependent on individual circumstances and may be subject to change in future. Taxation Advice and Trusts are not regulated by the Financial Conduct Authority. A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. Time Financial Planning Limited is an appointed representative of The Whitechurch Network Limited which is authorised and regulated by the Financial Conduct Authority.