For those that have put investments in place, particularly those that did so many years ago, the term ‘UK Investment Bond’, or ‘Onshore Bond’ may sound familiar. A variety of different insurance providers offer these investment products, such as Aviva, Prudential, and Legal & General, to name a few.
The tax treatment of onshore bonds potentially makes them tax efficient for some individuals, the same applies for investments held in Trust, but at what point do they become inefficient?
I’ve held my investment bond for over 20 years
If this is the case, and you regularly take an income from your investment bond, you may have started receiving letters relating to ‘chargeable events’, which may need to be added to your tax return or indicate further tax is due. These (among other reasons) can occur when an investment bond has returned the initial capital invested, and where profit is now being paid out to the investor when income is received.
At this point, speaking with a financial adviser may be worthwhile, as it could be best to cease taking an income from the investment bond or encash this entirely (though in some scenarios it may still be best to retain the investment bond as a life insurance product). Tax consequences should be considered when encashing the investment bond and, although it may be that no tax is incurred on the sale, it would be sensible to seek advice beforehand.
It may be that a Stocks & Shares ISA or ‘unwrapped’ investments are more suitable moving forward for smaller investment amounts, or investing proceeds into another investment bond structure that can again generate a tax deferred income up to 5% p.a. for up to 20 years (collectively, returning 100% of the initial capital). By taking action with an investment bond producing Chargeable Event Certificates, you may also find that you have no need to submit tax returns annually moving forward (depending on your other income), potentially saving on other professional fees elsewhere.
I’m a Nil Rate or Basic Rate Taxpayer, or I’ve not used my ISA allowance
Whilst you are allowed tax deferred withdrawals up to 5% p.a. of your original investment for 20 years (i.e. the return of invested capital), profits within the bond pay a rate of tax at the equivalent to the basic rate. Where profits are eventually withdrawn from the bond, there would be no further taxation if you remain a nil rate or basic rate taxpayer.
However, you cannot reclaim tax paid as a nil rate taxpayer and, where higher rates of taxation may be due, investments may still be better held elsewhere. You have an ISA allowance of £20,000 per year available, with investments avoiding tax on profits of any kind within an ISA. Individuals may also have annual dividend, capital gains and personal savings allowances, and therefore an investment portfolio of under £100,000 would likely pay only limited tax unless excessive profits were achieved, which may be preferable to 20% tax within the Investment Bond.
It should be noted that ‘smoothed’ investments, or traditional with-profits funds that aim to limit volatility, were historically only available within an investment bond wrapper. More of these types of investments are also now available in ISAs, but where these strategies fall in-line with your views on risk and objectives, and proposed investment amounts exceed ISA allowances, an investment bond structure may still be suitable, as you shouldn’t “let the tax tail wag the investment dog”.
How to discuss your financial planning further
Given our extensive experience of investing at MHA Caves Wealth, helping people plan financially with their current objectives and future goals in mind, and navigating the ever-changing taxation rules, you may find it useful to have a discussion with us about your own requirements. Please call us on 01604 621421 and ask to speak to one of our financial advisers.
MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715. Tax and Estate Planning services are not regulated by the FCA.
Key Risks: Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested. Investment markets and conditions can change rapidly, along with tax legislation. Investments should always be considered long term.
This communication is for general information only and is not intended to be individual product/investment advice, tax or legal advice. The views expressed in this article are those of MHA Caves Wealth and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. You are recommended to seek professional regulated advice before taking any action.