Investment Bonds

An investment bond is technically a single premium life assurance contract although the life cover aspect is only nominal. Offshore Bonds are collective investments in which the investments of many individual investors are pooled. They are technically single premium life assurance contracts and therefore normally have nominal life cover attaching, however they can also be written on a capital redemption basis without a life assured. A wide choice of funds is available ranging from managed to specialist funds.

Bonds are collective investments in which the investments of many individual investors are pooled. This pooling enables relatively small investors to benefit from the economies of scale made available to institutional fund managers.

To be eligible to invest in an investment bond, an investor must be 18 years of age or over. The investment can be made on a single or joint basis, or by a company or trustee(s). The nominated lives assured are usually the applicant/investor but could also include an individual aged under 18, if so wanted.

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. Investment Bonds are sometimes (incorrectly) described as a tax-free investment when they should really be described as tax-paid, since basic-rate tax is deemed to have already been deducted at source. Therefore, there is no further liability to either income or capital gains tax (providing any top-sliced gain does not take their total taxable income above the basic rate band).

The underlying funds of Investment Bonds are subject to tax within the fund on income and gains (after indexation). Any ‘income’ you need is achieved by selling units.

Investors also benefit from the ‘5% rule’ which allows them to withdraw up to 5% of the initial premium each year (until such time as all of the original investment has been withdrawn) with no immediate personal tax liability, making it particularly attractive to higher and additional rate taxpayers.

Bonds can either be Onshore or Offshore – Onshore Bonds are done through UK-based companies whilst Offshore Bonds are the opposite, and the most popular are those issued by subsidiaries of well-known UK life offices in countries such as Luxembourg, the Republic of Ireland, the Channel Islands and the Isle of Man. The income and gains of an Offshore Bond will normally be free of tax in the relevant jurisdiction, and so are often referred to as benefiting from ‘gross roll-up’.’

The ability to defer tax is greater under an Offshore Bond than an Onshore Bond, and so the longer it is held, the greater the compounding effect of the tax deferment. All things being equal, an Offshore Bond will create a greater return than an Onshore Bond over the longer term. However, the greater the level of withholding tax and management expenses (an Offshore Bond has no tax from which it is able to deduct management expenses) the less an investor will benefit from gross roll up.