Money Basics - Investment Bond / Endowment Myths
Money Basics – Investment Bond / Endowment Myths
Money basics is a series of short articles where we will explore several themes that confuse and bewilder and try to break down all the legalistic jargon into plain English.
So far we’ve covered Pensions and ISA accounts, so what about bonds.
What is an investment bond?
The trouble here is that the word ‘bond’ can mean a whole variety of things:
- There are the ‘bonds’ you get from the bank, fixed term and fixed return products.
- There are bonds that you buy on a market – fixed interest securities like gilts.
- The word bond is actually synonymous with debt of all kinds
We aren’t talking about any of the above bonds.
As an aside; the difference between assurance and insurance is assurance is asset-backed.
This is relevant because an investment bond is a life assurance product, and they have several benefits and drawbacks.
How are they taxed?
This question is pretty tricky, they come in broadly two different types – remembering last time that the bond is just the tax wrapper? It is not the investment but the way you are holding the investment.
There are offshore and onshore bonds.
An offshore bond typically pays very low or no tax, whereas an onshore bond is a UK Life Office and therefore pays corporation tax.
Both of them allow you to withdraw 5% of the initial investment a year in a seemingly tax-free manner, they essentially allow you to withdraw your capital over 20 years.
On any gain, with an onshore bond the basic rate tax is deemed paid, so if you have an onshore bond you are paying basic rate tax and cannot reclaim it. Any gains may be subject to higher rate tax dependent on whether the gain pushes your income into it.
There is this thing called top-slicing relief, but that is an article in itself.
For an offshore bond all gains are treated like no tax has been paid and they are all subject to income tax, with top-slicing as before.
You may be looking at the above and wondering why to bother with one, ISAs are clearly better.
If you are a trustee – bonds are simpler as some trust pay tax like additional rate taxpayers and the bond can be assigned to the beneficiary avoiding trustee tax.
They are also specifically disregarded from the financial assessment test for the purposes of care funding, however only if they were arranged before care became a possibility.
If you are planning on moving country it makes a lot of sense to have an offshore bond as you will then only pay the relevant tax in the country you are living in – avoiding the potential of double taxation.
They do tend to be fairly expensive, taxation is complicated on them.
Some of the benefits are barely benefits at all – like the 5% withdrawal limit, you can take your capital back on other investments too.
Our in house Independent Financial Advisors can help you with all aspects of financial planning including pensions, investments and inheritance tax planning. If you need any legal advice, please contact the Chattertons’ Wealth Management team at your nearest office.