Investment Bonds

These are investments packaged as life assurance, primarily designed for investment but with an insurance over-ride (often 101% of the investment value).

They are a very old type of investment policy, and thus are governed by some complex rules.

The funds are taxed, and because this is taken into account when you take benefits, as a general rule only higher and additional rate taxpayers (or those whose profit from the bond makes them such for the purposes of this computation) are likely to have any additional tax liability on gains.

By and large, older single premium bonds have been superseded by more modern unit-linked investments (governed by normal income tax and capital gains tax rules, within the funds).

However they still have some uses for people with particular requirements, especially those who have already maximised their use of other types of tax planning. Below are three features that can be useful for some people:

  • Return-of-capital rules – one of the quirks of these bonds is that you can withdraw up to 5% of your original investment each year (up to a maximum of 100% of original investment i.e. over 20 years), and it will be treated as a return of your capital, and, therefore, not part of your income. This allows tax to be deferred for up to 20 years. (5% a year for 20 years is 100% of original investment).
  • Profit taxed as income when realised – this also allows tax to be deferred. For example if you have a high level of income at the moment, but will have a low income in the future (eg after retirement) then by leaving the taking of gains until after retirement you might avoid taxes that you might incur if you took them now.
  • Local Authority means testing rules – when a Local Authority carries out a means tested calculation, for example if you are claiming care benefits, any investment bonds that you hold will be excluded from the calculation provided that you have not invested in a bond simply to avoid any liability.

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