Deciding on an investment bond recommendation requires thoughtful consideration. Julia Peake, Technical Manager at Nucleus takes us through some of the key benefits and areas for paraplanners to bear in mind.
Investment bonds can offer tax efficiencies far and above just using them as an asset for a trust to assist with estate and inheritance tax planning. Some of the key considerations and benefits are:
- Investment bonds are a long-term savings and investment product (rather than an insurance in the general sense) which may pay out on certain events such as maturity, surrender, or death.
- The money invested is split proportionately among a number of identical policies, often referred to as segments or clusters which is beneficial for tax planning if working with a cash flow modelling tool or when looking to do wealth generational planning. More individual policies could mean the gain per policy is smaller and a more targeted approach can be taken when looking to surrender or assign individual policies.
- Onshore bonds are taxed within the fund so upon a chargeable event, a basic rate tax credit is applied. If the policyholder remains a non/starting or basic-rate taxpayer, then no further tax is due.
- Offshore bonds benefit from gross roll up within the fund and grow tax free minus any non-reclaimable withholding taxes. Upon a chargeable event there is no tax credit applied.
- Some offshore bond providers will allow their bonds to be set up on a life assured or capital redemption basis which means clients have options to suit their circumstances.
- The ability to switch funds and make changes to the underlying assets, without a tax consequence for the policyholder
- 5% of the amount invested can be withdrawn, tax deferred. The 5% allowance is cumulative and can roll over for use in future policy years. This is a return of capital, not income, so doesn’t impact income tax unless there is a chargeable event.
- They are non-income-producing assets, so it’s simple to administer and there are no reporting requirements to HMRC until a chargeable event occurs.
- Great bedfellow for trustee investment- non income producing assets which means reduced administration so can help with IHT and estate planning.
- Frozen tax allowances means these can be a tax efficient investment and reduce tax whilst still maintaining withdrawals/ “income”
- Segmentation adds flexibility for assigning part or all of the bond to another by gift and adds control over when any tax could be due, and who is liable to pay it. That makes them great for generational wealth planning and for targeting withdrawals within tax allowances.
- Chargeable events are counted as savings income under income tax and so can use personal allowance, personal savings allowance and starting rate for savings, if available, to offset chargeable gains.
- Adding younger lives assured could potentially extend the policy term, preventing a chargeable event on the death of older policy owners.
- Top slicing relief, deficiency relief, and time apportionment relief might apply depending on circumstances to reduce the tax payable on a chargeable event.
When looking at surrendering individual policies or the bond itself you also need to consider the final insurance year and tax related transaction rules.
A policy, or insurance, year runs from the start date of the policy to the day before the anniversary the next year. If an event (such as a full surrender of rights, death, or maturity) brings a policy or contract to an end, , the insurance year is treated as ended on that date. It is then referred to as the ‘final insurance year.’
The ‘final insurance year’ can be extended where a policy is surrendered, and both the anniversary and the date of surrender fall into the same tax year.
When this happens, the ‘part’ policy year, is combined with the previous policy year to make a final year of more than 12 months.
Only one 5% tax deferred allowance is available for this final year, and any previous excess partial surrenders are superseded by the terminal event.
You also have to be careful of the ‘transaction-related calculations’ if withdrawals have been taken and the policy is surrendered.
In this situation the policy year end is brought forward to the date of surrender/encashment, and a ‘final’ chargeable event calculation is carried out.
If, in the final year, there is an assignment and withdrawal(s), the ‘transaction-related calculations’ apply where the final gain is split to consider any withdrawals prior to the assignment, which are in excess of the 5% tax deferred allowance.
These are assessed on the owner before the assignment, please see IPTM7635 – Transaction-related calculations: example: part surrenders followed by a gift part assignment followed by another part surrender in same year – HMRC internal manual – GOV.UK
If the final year has been extended to include the previous policy year, then there is only one 5% tax deferred allowance available for that extended year, so it’s more likely the previous bond owner would be liable for some of the gain.
The history of each bond will determine the factors and timing for when you may wish to assign and surrender but any final year or transaction related charges should be considered.
Main image: investment bond, markus-winkler-_QZ9nWYPbZk-unsplash (1)
