Onshore Investment Bonds
Onshore Investment Bonds
To be eligible to invest in an investment bond, an individual investor must be 18 years of age or over. The investment can also be made on a joint basis, or by a company or trustee(s).
The nominated life (lives) assured is usually the applicant / investor but could also include an individual aged under 18.
The minimum lump sum is usually £5,000 but this may be higher or lower depending on the provider. The maximum limit will be set by the provider.
You can withdraw some or all of your money whenever you need to.
You can benefit from the ‘5% rule’ which allows you to withdraw up to 5% of the initial premium in each policy year (until such time as all of the original investment has been withdrawn, for example 20 years if 5% is withdrawn each year) with no immediate tax liability. At the start of each policy year, a tax deferred allowance is accrued of 5% of the premiums paid. If this allowance is not used it can be carried forward to use in future policy years (the cumulative allowance).
Should you need to make withdrawals in excess of the 5% entitlement in order to achieve the necessary ‘income’ level in the future, any such excess would be added to your taxable income in the year and only if income goes into the higher rate tax band would a tax liability arise (with top-slicing being available if your total taxable income does not already fall into the higher rate tax band).
Top-slicing is also available to higher rate taxpayers where the total gain is not covered by the higher rate band, in order to assess whether any additional rate tax is due.
The fund is deemed to have suffered 20% on its own income and capital gains. The liability on the excess for an investor will depend on their level of total taxable income (in the 2023/24 tax year the additional tax rate will only apply if total taxable income, including the top-sliced bond chargeable gain, exceeds £125,140).
The final ‘sweeping up’ chargeable gain on full encashment is calculated by adding the amount paid on surrender to the total of all previous withdrawals and deducting from that the total of all previous chargeable excesses and the single premium paid. If you are not already a higher / additional rate taxpayer, the gain is then top sliced over the total number of years that the policy has been in force and the ‘slice’ added to income to establish the tax rate applicable.
On death of the last life assured a lump sum will be paid out based on the surrender value of the investment, this will be taxed in the same way as a surrender.
You should also be aware that if a chargeable gain occurs, the full gain is added to your other income in the tax year for the following purposes:
· In order to assess whether ‘adjusted net income’ exceeds £100,000 and the Personal Allowance is reduced or lost (lost completely once total income reaches £125,140 currently)
· In order to assess whether ‘adjusted net income’ exceeds £50,000 and the High Income Child Benefit Tax Charge is applied (the child benefit is clawed back completely by way of the tax charge once adjusted net income reaches £60,000)
· In order to assess whether Married Couple’s Allowance is reduced (i.e. where at least one of the couple was born before 6 April 1935) – This allowance is reduced if ‘adjusted net income’ including the full gain exceeds £34,600 (2023/24)
· To calculate ‘adjusted income’ (a different figure to the above) and ‘threshold income’ when assessing whether the pensions annual allowance needs to be tapered – If adjusted income exceeds £260,000 and threshold income exceeds £200,000 the annual allowance is reduced (to a minimum of £10,000 if adjusted income reaches £360,000 plus)
The Provider may apply penalties to your investment in the event of partial or full surrender of the Bond within the first few years of investment. These are applied on a sliding scale basis, over the period.
Trust Registration Service (TRS)
The Trust Registration Service (TRS) is a government register of the beneficial ownership of trusts. From 6 October 2020, the scope of the TRS was extended, the new rules are to ensure that the UK has an anti-money laundering and counter terrorist financing regime that is; up to date, effective, and proportionate. The rules will improve transparency about the ownership of assets held in trust.
If the investment bond is written under trust, it will need to be registered on the TRS. The deadline for registration is 1 September 2022 or 90 days from trust creation if later.
The trustees can designate a ‘lead trustee’ to register the trust or an ‘agent’. The ‘agent’ would need to be a business which operates as an accountancy service provider.
There are a number of risk considerations that need to be taken into account. It is important that you are aware of these.
· Past performance is no guarantee of future returns.
· If growth is low, charges may eat into the capital invested.
· Any ad-hoc or ongoing adviser charges being paid from an investment bond will count towards the 5% tax deferred allowance.
· The value of this investment is not guaranteed and on encashment you may not get back the full amount invested.
· If withdrawals are made at a rate which exceeds the net growth of the fund, capital will be eroded.
· Before making any withdrawals in excess of the cumulative 5% allowance, you should seek advice in respect of the most appropriate and tax efficient method of achieving this.
· The price of units and the income from them can fall as well as rise.
· An early withdrawal charge may apply.
· The government may change the tax rules that currently apply to onshore bonds.
· Please be aware that there may be occasions when an individual fund or funds may have a higher risk rating than your overall stated attitude to risk. If this is the case, then the overall risk rating applied to all of the combined funds being recommended will still be designed to meet your stated tolerance.
· The illustration uses certain assumed rates of growth, as prescribed by the Financial Conduct Authority, these rates are not guaranteed.
The internal taxation of onshore bond (life) funds is complex but in general terms the position is as follows:
Interest, foreign dividends and rental income – 20%. UK dividends – no further tax to pay within the life fund
- Capital gains
20% (indexation is available up to Dec 2017 to reduce the gain)
It is normally assumed that overall life fund taxation is just below 20% (and that the tax credit given to onshore bond investors gives a slight advantage over what will have actually been paid). It is unclear what effect the freezing of indexation allowance at December 2017 has had.
Personal Taxation (income tax)
Withdrawals of up to 5% per annum of the amount invested can be taken on a cumulative basis without any immediate income tax becoming payable. Any gains will only be assessed for income tax purposes when a chargeable event occurs, i.e. withdrawals above 5% pa cumulative are made, full surrender of entire bond or full segments, death of last life assured. Gains are added to the individual’s other income in the tax year to determine if any income tax will be payable.
A 20% tax credit is given for the tax deemed payable within the fund. Unless the top-sliced gain takes total income into the higher rate band this will be the extent of the liability for basic rate and non-taxpayers (i.e. no personal liability).
Someone who is already a higher rate taxpayer (or where part of the slice falls into higher rate) will have at least 20% (40%-20% credit) tax to pay on some or all of the gain as applicable but can top-slice to see whether any additional rate tax is due.
Additional rate taxpayers will have an additional 25% income tax liability.
Where top slicing is available, the time period goes back to inception for full encashments of whole bond or segments, or back to inception or date of the last chargeable event (if there has been one) on part surrenders (assuming UK residence throughout).
The full gain before top slicing is added to income to assess entitlement to the Personal Allowance (i.e. if the full gain takes income above £100,000), Married Couple’s Allowance (only available if born before 6 April 1935), Child Benefit, Personal Savings Allowance.
For gains occurring on in 2018/19 onwards, when assessing the tax due on the slice, the availability of the Personal Allowance is assessed using the slice rather than the full gain(s).
Time apportionment relief is available to reduce the gain in respect of any periods of non-UK residence for onshore bonds that commence after 5 April 2013 or older onshore bonds that are assigned or incremented after that date.
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