An investment bond is a single premium life assurance policy where you can invest into a wide range of funds and asset allocation classes as selected by you.
The minimum investment is usually £5,000, but product providers will differ. Offshore bond providers are to be found, in the main, in the Isle of Man, Guernsey and Jersey, as well as Dublin, for UK investors. The offshore status gives certain tax advantages to the investor.
‘Tax Deferred’ – Sounds interesting, doesn’t It?
Each year the investor could draw down up to 5% of the original investment on a ‘tax deferred’ basis. These 5%’s are cumulative, so if you draw down nothing for say 4 years, you can then draw down 4 x 5% =20% without immediate tax being payable.
Tax deferred means that no tax is payable on the withdrawal up to 5% p.a. but there could be a tax charge on maturity of the investment, or surrender of it, or on the portion withdrawn above 5%, and death of the last life assured. These are known as ‘chargeable events’.
Pay Attention!
It is important to differentiate between an onshore and an offshore investment bond.
| Differences | Onshore (UK Bond) | Offshore (non UK) |
| Investment Growth |
Taxed annually at 20%, after exemptions |
Gross roll-up – no tax,apart from some withholding tax |
| Minimum Age | None | 18 |
| On maturity/surrender | ||
| Basic rate taxpayer |
No further tax as deemed paid at 20% |
Gain taxed at 20% |
| Higher or additional rate |
Added to taxable income less 20%, with top-slicing relief |
Gain taxed at marginal rate, with top-slicing relief
|
| If non resident at maturity |
Rules of foreign country apply |
Rules of foreign country apply |
| Similarities | ||
| Withdrawals | Up to 5% p.a. tax deferred | Up to 5% p.a. tax deferred |
| Capital gains tax | None | None |
| Income Tax | Yes on gains | Yes on gains |
| Defer tax charge | Up to 20 yrs or longer | Up to 20 yrs or longer |
|
Assign segments to lower rated taxpayers who encash at lower tax rates |
Yes |
Yes |
It will generally be better from a tax point of view to surrender individual segments of the investment bond instead of surrendering parts of the whole investment bond.
As investment bonds are deemed to be non-income producing, taking the 5% withdrawal is tax efficient. This is particularly the case for trusts, where taxation of income-producing assets can be at 50%. No annual tax returns are required for individuals or trustees.
Pros and Cons
An offshore bond has advantages as well as disadvantages. Advantages include tax free growth of investment funds, fund switches within the bond do not give rise to a CGT or income tax liability on the investor, and there are no tax reporting requirements. The bond can be assigned as a gift without income tax payable (also if gifted to a trust), and for the age allowance, the 5% withdrawals are not treated as income.
However, there are disadvantages, and these include chargeable event gains that can suffer tax at up to 50% on encashment of a bond; there are no ways to use a capital gains tax allowance as gains are subject to income tax; and on the death of the last life assured, there could be inheritance tax and income tax due.
Practical Tip
A UK resident but non-domiciliary investor can change offshore assets to an offshore investment bond to avoid the £30,000 (to be increased to £50,000) annual ‘remittance basis’ levy, and still have regular withdrawals without immediate taxation. Also, investment bond investments could be excluded for the capital means test for those going into residential care.
As always, investments carry risk, and specific professional advice should be obtained.
By Tony Granger
