Investment Bonds

An investment bond is a sort of medium to long-term savings product that allows you to invest a large sum of money in a range of insurance company-provided funds. Investment bonds, unlike other assets such as stocks or real estate, are structured as life insurance plans, making them an intriguing hybrid product.

Depending on the size of your investment, the returns could also be used to provide a regular income to pay for care fees.

They’re not to be confused with other investments that have ‘bond’ in their name, such as guaranteed bonds, offshore bonds or corporate bonds.

Investment Bonds can be set up on the following bases:

• Single Life
• Joint Life First Death
• Joint Life Second Death
• With multiple lives assured
• Capital Redemption Bond (no lives assured)

On death of the life assured (or the second/last to die with joint/multiple life plans), up to 101% (depending on the product) of the value of the fund is payable to your beneficiaries.

They are designed to provide capital growth but can also facilitate a regular income withdrawal. Regular withdrawals of up to 5% of the amount invested may be taken each year free of any immediate tax liability until 100% of the original investment has been withdrawn. Withdrawals in excess of this are possible, but an immediate tax charge is likely if you are a higher or additional rate taxpayer at the time. Nil or basic rate taxpayers may also face an income tax charge depending on the level of investment gain and period of investment.

Types of Investment Bonds: –

There are two types of investment bonds; onshore and offshore. The main difference between them is in how the tax rules are applied.

1. Onshore (UK) investment bonds

Onshore bonds are subject to UK corporation tax. It’s treated as a non-income producing investment, which means it has a different tax treatment from other UK based investments, and this can provide valuable tax planning opportunities.

The tax rules for onshore bonds mean that:

• The underlying fund selection can be switched without generating a personal liability to capital gains tax as the switch is done within the bond itself
• Any dividend income received within a fund from UK equities is not taxed
• Life company pays tax of 20% on any interest and other income received, such as rental income, from the funds available in the bond
• Life company pay 20% tax on any capital gains made by funds available in the bond

All this means that HM Revenue & Customs treat the tax paid as being the same as the basic rate income tax even though the actual tax paid in the bond may be less. In practice, this means that people who are basic rate taxpayers when the bond matures or is encashed pay nothing more. If you’re higher or additional rate tax payer or become one when the bond is encashed, then there could be a tax liability which your adviser can discuss with you in more detail.

2. Offshore (International) investment bonds

Offshore is the common term for investment bonds issued by companies outside of the UK.

Our offshore bonds are issued from the Isle of Man by Canada Life International Limited and CLI Institutional Limited. Both companies are fully authorised Isle of Man resident life assurance companies that have been granted tax-free status by the Isle of Man government. We also issue investment bonds from Ireland by Canada Life International Assurance (Ireland) DAC which is not subject to Irish tax where the policyholder is resident outside Ireland.

The tax rules for offshore bonds mean that:

• The underlying fund selection can be switched without generating a personal liability to capital gains tax as the switch is done within the bond itself
• Any dividend income received within a fund from UK equities is free of tax. Dividends from other countries may be subject to a withholding tax and this cannot be reclaimed
• HMRC do not make any allowance for any withholding tax suffered under an international bond

The different way of taxing an offshore bond means that it might grow faster than an onshore bond, although this isn’t guaranteed. However, you will pay income tax on any gain at your highest marginal tax rate because with an offshore bond, you’re not treated as having paid basic rate tax on any gain.