The Increasing Popularity Of The Investment Bond
At Transact we, along with other providers, have seen a significant increase in new business flows into our investment bonds. This has been driven by the reduction in the dividend tax allowance from £2,000 to £500 per annum, and the annual exempt CGT allowance reduction from £12,300 to £3,000 per annum. This means the point at which an investment bond is a possible next step in a client’s tax planning arrives much quicker once pension, ISA subscription limits and the allowances applicable in a General Investment Account (GIA) (including the Dividend Allowance of £500, the Personal Savings Allowance of £1,000 for basic rate taxpayers or £500 for higher rate taxpayers) have been utilised. That said, the GIA, where tax is paid as you go rather than deferring tax until a chargeable event arises in the bond, is likely to give a better outcome where the investor’s tax rate remains the same as illustrated below:
Assumptions used in the comparisons are:
- Adviser Fees 0.75% (treated as withdrawals)
- Fund Manager 0.50%
- Transact Fees Based on tiered discounts
- Wrapper Fees £72 for Onshore Bonds / £240 for Offshore Bond (p.a. added quarterly)
- Growth 7% p.a.
- Income after fees is assumed to be reinvested
- Any chargeable gain falls within assumed tax band
- Assumes no rebalancing
- CGT allowance only used in year of encashment.
Comparison 1 – Individual’s tax rate remains the same before and after encashment
- £250,000 investment – no tax allowances available
| Comparison of projected values | ||||||
|---|---|---|---|---|---|---|
| Term (Years) | 3 | 5 | 10 | 15 | 20 | |
| Basic Rate | Onshore Bond | £284,958 | £310,956 | £386,873 | £481,421 | £599,174 |
| Offshore Bond | £283,067 | £308,261 | £384,449 | £484,075 | £614,507 | |
| GIA | £288,620 | £317,913 | £405,766 | £519,339 | £666,305 | |
| Higher Rate | Onshore Bond | £276,762 | £296,665 | £354,786 | £427,173 | £517,330 |
| Offshore Bond | £273,275 | £291,011 | £344,653 | £414,812 | £506,684 | |
| GIA | £280,899 | £304,063 | £372,384 | £458,670 | £567,670 | |
| Additional Rate | Onshore Bond | £274,713 | £293,092 | £346,764 | £413,611 | £496,869 |
| Offshore Bond | £270,827 | £286,698 | £334,704 | £397,496 | £479,728 | |
| GIA | £279,828 | £302,122 | £367,623 | £449,906 | £553,280 | |
However, if the investor’s tax rate is lower when the policy proceeds are taken then the onshore bond gives the better outcome in the earlier years, and the offshore bond in the later years as shown below. This also applies if the bond, or any part of it, is assigned to someone who, when they take the proceeds, is a lower rate taxpayer. This could be, for example, the beneficiary of a trust that holds an investment bond.
Comparison 2 – Higher rate tax in accumulation and basic rate tax on encashment
- £250,000 investment – no tax allowances available
- This example assumes that the tax rate is lower when benefits are taken than during the investment term. In this example higher rate to basic rate.
- The “Higher Rate” part of the table below shows the projected value prior to tax on the gain, the “Basic Rate” shows the value after tax.
| Comparison of projected values | ||||||
|---|---|---|---|---|---|---|
| Term (Years) | 3 | 5 | 10 | 15 | 20 | |
| Higher Rate | Onshore Bond | £284,958 | £310,956 | £386,873 | £481,421 | £599,174 |
| Offshore Bond | £292,859 | £325,512 | £424,245 | £553,339 | £722,330 | |
| GIA | £287,589 | £315,739 | £398,763 | £503,620 | £636,070 | |
| Basic Rate | Onshore Bond | £284,958 | £310,956 | £386,873 | £481,421 | £599,174 |
| Offshore Bond | £283,067 | £308,261 | £384,449 | £484,075 | £614,507 | |
| GIA | £284,244 | £309,901 | £385,574 | £481,145 | £601,870 | |
Investment bond gains also benefit from top slicing relief where an individual investor pays tax at both basic and higher rate (or at both higher and additional rate) on the gain so that some or all of the higher rate liability is removed. Furthermore, if proceeds are taken in a year where non-savings income is less than the Personal Allowance then a gain of up to £18,570 (Personal Allowance plus Starting Rate for savings plus Personal Savings Allowance) could be realised in an offshore bond before any income tax is due.
We now know that there is to be a General Election on 4 July and there are likely to be further tax changes made by the new government as it seeks to fund its manifesto promises. Any further attack on Capital Gains Tax, such as increasing the rates, could further improve the relative position for investment bonds, but the likelihood of further tax changes in the future means putting ‘all your eggs in one basket’ in the short term, which may not be a sensible approach, whilst client’s individual circumstances will also affect how the differing wrapper types are implemented.
Transact offers both an onshore and offshore investment bond which provide access to a wide choice of investments and allow up to 1,000 identical segments for withdrawal and assignment flexibility. Our Client Service teams can assist with any processing queries while specialist support can be accessed directly from our Isle of Man team in relation to the offshore bond. In addition, the Technical Services team provide more detailed tax related support including providing chargeable gain and top slicing calculations and will provide these in relation to non-Transact bonds if required.
1. Introduction
2. TOL Recent Enhancements
3. Non-advised Clients Need Advice
4. Removal of Adviser Purchase Related (Initial and Switch) Fees
5. New Sustainability Disclosure Requirements
6. Insights From Australia
7. Transact – BlackRock MPS
8. The Increasing Popularity Of The Investment Bond
9. Transitional Tax-Free Amount Certificates
10. Interest on Cash
11. Transact Events 2024