What are Investment Bonds?

The Wokingham Paper - - NEWS - With Tim Em­ble­ton from Time Fi­nan­cial Plan­ning

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 [email protected]­ited. 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.

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