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Investment Bonds
A single premium non qualifying life assurance policy

The technical term for an investment bond is 'A single premium non qualifying life assurance policy' according to the text books. So what does all that mean and why would I want one?

Once you have used your annual ISA allowance and you still have money to invest, but do not wish to commit your money to a Pension, investment bonds are the next most tax efficient way of putting away your hard earned savings.

Investment bonds, like almost everything in these days come in variety of differing forms. We are not proposing to cover them all here, but the most common choice to make is whether to use an Onshore or an Offshore investment bond.

An investment bond passes the ownership of the investment to the insurance company or wrapper provider. This means that the tax liability on the income and growth are no longer part of your personal tax allowance. It is only when the assets are returned to your ownership that you become liable for the tax. This is commonly referred to as Tax Deferral, you may still have to pay some tax, but not until you cash in the investment.

You can take a regular income from an investment bond and if you limit the income to 5% of the original investment you will not trigger a chargeable event [liability to tax] as this would be considered a repayment of your original capital. Over a 20 year period you could receive your money back leaving just the growth inside the bond.

 

Whether you would have to pay tax on the remaining money after that would depend on your tax status at that time. If you have not taken an income from the bond for say for the first 3 years, you take up to 3 X 5% without incurring a chargeable event.

Onshore investment bonds are subject to corporation tax. The tax will have to be paid by the wrapper provider or the insurance company on an on-going basis.

The Offshore bond wrapper/ insurance company does not pay any Corporation Tax therefore benefits from gross reinvestment of income and gains known as gross roll up. This leaves more capital for the investor.

At encashment top slicing is used to establish the total tax liability. Should you be or become a higher or an additional rate tax payer as a result of the top-slice being added to your income you will become liable to an additional tax payment. We recommend that you contact a qualified tax adviser to assist you with your tax affairs.

Using an investment bond can help reduce the amount of tax you have to pay now and potentially in the future.


 
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