Investment Bonds

Investment Bonds are investments packaged as life assurance. They are a very old type of investment policy, and thus are governed by some complex rules.

Investment Bonds: Tax issues

The funds are taxed and because this is taken into account when you take benefits, as a rule only higher 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By and large single premium bonds have been superseded by more modern unit linked investments (governed by normal Income tax and Capital Gains Tax rules, or with tax advantages - like ISAs).

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.

Investment Bonds: Return of capital rules

One of the quirks of these bonds is that you can withdraw up to 5% of your original investment (up to a maximum of 100% of original investment i.e. 20 years) each year and it will be treated as a return of your capital, and therefore NOT part of your income. This defers any potential tax liability until such time as the bond is cashed.

Investment Bonds: 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.