Onshore Bonds
Investment bonds are used to invest one-off lump sum payments. If you have a lump sum to invest, you’ll want it to work as hard as possible for you .
Many investment bonds now offer a greater range of investment through external links to unit trust/ OEIC funds. One of the benefits is that they allow tax deferral on withdrawals from the policy and can be used in effective tax planning, particularly for higher rate taxpayers
A bond can provide you with a regular income; provide steady capital growth over the medium to long-term* , or a combination of the two.
When investment bonds are encashed, the profits made are taxed as income rather than capital gains. The Inland Revenue deems that basic rate income tax has already been been paid at a rate of 20%, so basic rate taxpayers may have no further liability. Non taxpayer and starting rate taxpayers cannot reclaim the tax already paid. Basic rate tax payers have no further income tax liability as long as the gain added to the taxpayer’s total income of the year does not push them into the higher rate tax bracket.
Due to the deferral of any tax liability until encashment makes Investment Bonds particularly attractive to higher rate taxpayers who know that they will become basic rate taxpayers at some point in the future. This means that during the lifetime of the bond they can make withdrawals and defer the liability on any tax until the policy is encashed. If at the time of encashment the policyholders have become basic rate taxpayers then there is a good chance that they will incur no tax liability.
* You should see your bond as an investment for at least 5 years although you can cash it in whenever you wish however there may be penalties for doing so such as MVRs and early surrender penalties.
