UK Onshore Investment Bonds
Wednesday 13th October 2021
Katy Baxter
When you buy an investment fund, you may choose to do so via a wrapper which helps confer certain tax benefits on the income and capital gains which you receive. A UK Onshore investment bond is one of the wrappers you can choose. UK Onshore Investment bonds are generally available for a single premium - that is, a one-off lump sum. You can choose how that money is invested from a range of options that combine a variety of different asset classes within the one fund. Life companies offer external links to fund management houses, increasing your scope to mix, match and specialise within your portfolio. Funds within a UK Onshore investment bond benefit from a non-reclaimable 20% tax credit. This tax credit will satisfy the liability for non and basic rate taxpayers and there is therefore no specific benefit to help such investors save tax. However, for higher rate taxpayers, it does offer the chance to defer any liability incurred on gains - and potentially reduce them in the process. For example, under income tax deferral rules, you can withdraw up to 5% of your initial investment each year, without becoming immediately liable for tax on it. This amount can be withdrawn every year for up to 20 years and it is not until a chargeable event gain occurs that you are assessed and have to pay additional tax on any gains. This postponement of the tax liability can be particularly advantageous if you are a higher rate taxpayer now but expect to become a basic rate taxpayer in future, perhaps after retirement. The tax charge applies at the rate you are paying when a chargeable event gain occurs not necessarily when the 5% deferred allowance withdrawals are taken. As the bond has already been paying the equivalent of basic rate tax during its term, in this example, you would end up owing nothing more. The structure of investment bonds means they can also offer facilities that some mutual funds cannot. Phased switching, to and from cash funds, for example, can help you drip into or out of a volatile fund. And, as life assurance products, they also carry life cover which guarantees your original capital should the worst happen (amount payable on death is generally 100.5% or 101% of the bid value of the units). However, you should be aware that, if your main objective is growth, particularly for higher-rate tax payers, there may be other, more tax advantageous ways to invest. For those who are considering estate planning and inheritance tax an Investment Bond can often be the ideal wrapper to have in a Trust because of the taxation advantages it offers. Before you make a decision we would always recommend you take professional advice so please do get in contact with us at Montgomery Estate Planning if you would like more information.
The Financial Conduct Authority does not regulate tax advice or Trusts.