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This website contains information which may or may not be applicableto your own situation and circumstances.

Any information or advice on this site does not constitute a personal recommendation. If you have any doubts as to whether a product or service is suitable for you, please seek independent advice.

Investment Bond Taxation

As bonds are life insurance policies, the insurance company will pay tax corporation tax on the income and capital growth generated by the investments held in the bonds at its ongoing corporation tax rate. Individual investors are not assessed for tax on the growth on bonds until they take withdrawals in excess of 5% per annum of the original investment amount, or they encash the investment. Beware partial surrenders can cause a tax penalty even where no growth has occurred in the investment!

Even when this assessment takes place through ‘Top-slicing relief’, existing higher rate taxpayers, or if the gain (part or full surrender in excess of the 5%) makes you a higher rate taxpayer, will any tax be due. This is because there is a special rule which allows annual withdrawals from bonds of up to 5 per cent for twenty years without any immediate tax liability.

It is possible to carry these 5 per cent allowances forward, so if you make no withdrawals one year, say, you can take out 10 per cent of your investment the next without triggering a tax charge. When you finally withdraw your money, these withdrawals will be taken into account.

The way ‘Top-slicing relief’ works is that your total gain (the difference between the amount you invested and the final value of the bond, including any withdrawals) is divided by the number of years you have held the bond to find the average annual gain. If the average gain, when added to your other income, falls within the basic rate tax band, you will have no further tax to pay. If it falls into the basic and higher rate tax band, you will be charged higher rate tax on the part that falls within that tax band multiplied by the number of years you have held the bond. If it all falls into the higher rate tax band, you will have to pay extra tax on the whole gain. However, you may be able to avoid paying higher rate tax by delaying the encashment of your bond until you are a basic rate taxpayer, say after retirement, or by gifting it to a spouse or partner who pays less tax.

MORE INFORMATION IS AVAILABLE HERE on Investment Bonds versus UT’s & OEICs.