Investments: Bonds

Bonds enable you to invest for long term capital growth and/or income.

Onshore Investment Bonds

You have a wide choice of funds available offering investment opportunities in equities, property and fixed interest securities. You can switch between these funds generally at no cost. 'Top up' facilities are available to add to your investment on a regular or ad hoc basis.

Unit Linked

These funds are 'pooled investments' often with a choice of Investment Managers. You can switch between funds and Fund Managers usually without charge. There will oftern be multi-manager funds as well as specialist funds.

With Profits

If you want a lower risk profile, the With-Profits Fund can bean attractive proposition. The returns to the Policyholder are smoothed by the Life Company Actuary to give a steady investment return.

Taxation

The underlying funds of Investment Bonds are subject to tax on income and gains. Any 'income' you need is achieved by selling units. Current legislation allows 5% of the capital to be withdrawn for up to 20 years with no immediate liability to tax. Withdrawals in excess of 5% are only taxable if they take you into the higher rate tax band.

The internal taxation of onshore bond funds is extremely complex. In general terms it can be summarised as follows;
Income

  • Interest, dividends and rental income are subject to corporation tax at 20%.
  • UK dividends are paid with a 10% tax credit which satisfies the fund manager's liability.

Capital

  • Corporation tax is payable on capital gains at 20%.
  • Indexation allowance is available to reduce the gain.

Offshore Investment

An offshore investment is one which is not under United Kingdom jurisdiction. Investment in an ‘offshore’ bond grows virtually tax-free at a potentially higher rate (see later for tax tratment).

You cannot necessarily avoid paying UK tax but, with careful planning, you can control when you pay tax.
If you are living abroad, or you plan to move abroad during the life of your investment, an offshore bond enables you to invest without any liability to UK taxes.
Offshore investment bonds do not generate income and hence generate no UK tax liability until the proceeds are brought back onshore.

Offshore Bond Taxation

Offshore bonds do not pay corporation tax on income and gains within the fund, although withholding tax on dividends is not reclaimable. This 'gross roll up' of income and gains helps the investment to grow more quickly than an onshore fund. Income withdrawals are achieved by selling units. Provided annual withdrawals do not exceed 5% of the initial investment, no liability to tax will arise until the bond is encashed in full, thus providing an important tax deferral opportunity.
Withdrawals in excess of 5% per annum are liable to UK Income Tax at your highest rate as is the overall gain on final surrender. On final encashment any 'gain' in the value of the Investment Bond (taking into account any previous withdrawals) is added on to your income and is subject to tax in the normal way. There is relief for any period you are resident outside the UK.

The value of investments can fall as well as rise and you may not get back all of your original investment. The tax treatment is dependent upon your individual circumstances as is based on current rules and may be subject to change in the future.

Fund Taxation

Offshore bonds are typically located in jurisdictions which impose no tax upon investment funds, such as Dublin, the Channel Islands and the Isle of Man.

Income

  • Interest, dividends and rental income are tax free.
  • Some non-reclaimable withholding tax may apply to certain overseas income.

Capital

  • No corporation tax is payable on capital gains.

The tax treatment is dependent on  individual circumstances and may be subject to change in the future.

Contact us for Investment Advice or for more Information...

All contact is treated in the strictest of confidence.
Tel: 0115 945 5199 between 8.30am and 5.30pm Monday to Friday - Email: info@davidburnell.co.uk

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