We often come across clients who have Investment Bonds who ask “why do I hold them?”, “should I keep them?” and even “should I do more?”. To help answer these questions, we should first ask what they are and why they are used.
What are they?
Very simply, they are lump sum investments with an insurance company. More technically, they are non-qualifying whole of life assurance policies which can be accessed at any time.
Why are they used?
· Income delivery
Investment Bonds provide the ability to take tax deferred capital withdrawals of up to 5% of the original investment sum each year until 100% of the original capital has been withdrawn, without triggering a tax liability. These tax deferred withdrawals are cumulative. If you did not take a withdrawal until the third year, 15% of the original investment may be withdrawn without creating a tax liability.
· Trust Investments
They are deemed to be non-income producing assets and so may be used in instances where generating income would have tax implications, such as under certain types of trusts.
· Inheritance Tax planning
· University funding
They can be segmented so that portions can be assigned to others. This could be part of a strategy of passing investments to those with a lower liability to tax.
Growth, including withdrawals, will ultimately be taxed with onshore versions paying basic rate tax within the fund. There are ‘top slicing’ calculations to effectively pro-rata any gains to ensure basic rate tax payers are not unduly penalised and benefit from this tax credit.
It is worth noting that fund changes within an Investment Bond do not create capital gains as would occur for general portfolios.
Keep, surrender, do more?
This will ultimately depend on your objectives and the tax implications. Investment Bonds enjoy a different tax treatment to other investments and have their place. Some feel that including an additional tax wrapper could be a hedge against future legislative change.
If you wish to discuss a new or existing Investment Bond with Laura, you can reach her on 01223 720241 or firstname.lastname@example.org