5 compelling reasons why investment bonds should form a key part of your financial strategy

By David Snelling

Your range of investment holdings form the heart of your financial plan and will play a big part in securing your future.

One useful investment option for growing your wealth are investment bonds, also commonly known as insurance bonds. With your Capital Gains Tax (CGT) allowance set to drop from next year, we may also see a resurgence of their use for UK residents.

Both the “onshore” (UK based) and “offshore” bond options are highly flexible and tax-efficient and can play a useful role in your financial plan.

This article focuses on the main features and benefits of offshore investment bonds. In the interests of providing a balanced view, next month I will focus on some of the main drawbacks of offshore bonds.

Read on to find out more about them and how they may benefit you.

Bonds can be seen as an investment wrapper

An investment bond is a life insurance-based investment. The value of the insurance policy is directly linked to the value of the underlying investments held within the bond. Probably the best way to think about an investment bond is as an all-encompassing wrapper for your investment, enabling you to pay money in and take it out when you like.

The insurance status can make them a highly tax-efficient way to save and invest. You’re able to leave your money to accrue in value without it being eroded by tax, and they also offer flexible opportunities to draw money from your bond as part of your wider income strategy.

Bonds can be used if you want to invest with a lump sum or regular contributions. Ideally your timescale should be five years or more for any bond investments you want to make.

Bond providers offer a wide range of investment options across all market sectors to match your risk attitude and to help drive your wider investment strategy. It’s also possible to switch the holdings between funds as and when your investment priorities evolve over time.

Here are five great benefits of bonds.

1. Bonds offer flexible income and tax options

One big benefit of bonds is the income flexibility they can give you.

You can use them to provide one-off payments, and a regular income stream to help fund your retirement.

You have the ability to withdraw up to 5% of your original capital each year, for up to 20 years, with no immediate tax being payable. This is often referred to as ‘gross roll up’. This 5% allowance is cumulative, meaning that any not used in a particular year will build up for future years.

Deferring tax in this way gives you the opportunity to delay the payment of tax on your investments until your circumstances change, such as:

  • If you move to a lower tax bracket after you retire
  • You relocate away from the UK
  • You want to assign all or part your bond to another family member.

Bonds can be segmented into many smaller identical policies at outset which gives further flexibility over the income and tax planning options available.

Furthermore, the underlying investments held within offshore bonds are not subject to UK taxation. Consequently, anything you draw from your bond in excess of the 5% income from capital, which results in realising a chargeable gain, will be charged at your marginal rate of income tax.

2. You’ll only be liable for Income Tax when there’s a chargeable event

You will only potentially be liable for Income Tax on bond income and gains when certain taxable events happen, known as “chargeable events”.

Some of the important chargeable events you should be aware of include:

  • Taking more than your 5% deferred tax allowance
  • The full surrender of your bond
  • The death of the final life assured.

As you can probably appreciate, this gives you a highly valuable level of control over when you’ll be liable for tax on your bond investment. It also means that, to an extent, you can also control who ultimately pays the tax due.

3. Top-slicing relief can further help minimise the tax on your bond

Top-slicing relief (TSR) allows any chargeable gains to be divided by the number of complete years you have held the bond.

This allows you to spread the tax charge over the whole period that you have held the bond, rather than just in the tax year when you realised the gain.

In addition to this, when you fully surrender your bond, the number of complete relevant years over which your tax liability is assessed is always deemed to be from the date you first invested in your bond.

This means that, with careful planning, TSR can be used to reduce, or even totally eliminate, the liability to higher rates of Income Tax when a chargeable gain arises.

4. They can be gifted and assigned to support your estate planning

Offshore bonds are classed as assignable, which means the ownership in whole or part, using the segmentation facility you read about above, can be transferred as a gift to someone else over the age of 18 without incurring a tax charge.

Likewise, they can also be gifted by means of a trust as part of your Inheritance Tax (IHT) planning strategy, enabling you to pass on some of the value of your estate to your beneficiaries in a tax-efficient manner.

In particular, trusts can be subject to tax at the top rates, and an offshore bond can mitigate this due to the benefits of the gross roll up described earlier.

5. Time apportionment

A further benefit of offshore bonds is that any chargeable gain you realise after you return to the UK will be reduced by the proportion of time you have owned the bond as a non-UK resident.

Furthermore, any future additions and top-ups made to your bond will benefit from this same time apportionment.

This facility makes offshore bonds an attractive investment option, even if you believe you may be returning to the UK in the future.

Get in touch

If you’d like to find out more about how you can utilise bonds as part of your investment plan, please get in touch.

You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

Please note:

The information contained in this article is based on the opinion of Charlton House Wealth Management and does not constitute financial advice or a recommendation to any investment or retirement strategy.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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