MAXIMISING INVESTMENT BOND FLEXIBILITY AND THE ADVANTAGE OF HIGHER SEGMENTATION

Investment bonds, whether onshore or offshore, offer investors valuable opportunities for tax planning and flexible withdrawals. One of the most important yet often overlooked decisions when setting up a bond is determining the number of segments or policies it should include. Until recently, our default number of segments for onshore and offshore bonds was 100, although investors could request up to 1,000.

Recognising that, generally, a higher number of segments is likely to provide greater flexibility, we have now increased the default number of segments to 1,000. Investors still have the option to select any number between 100 and 1,000 to suit their individual needs. In most cases, higher segmentation offers greater flexibility when planning withdrawals, allowing greater granularity for investment withdrawals and chargeable gains.

The Strategic Value of Higher Segmentation

The number of segments within a bond directly correlates with the level of flexibility an investor has when accessing their capital in the future. For instance, consider a bond valued at £100,000 with only 20 segments— each segment is worth £5,000 meaning that a segmental withdrawal can only be made in £5,000 increments, potentially forcing investors into taking partial withdrawals to obtain a specific withdrawal value.

In contrast, the same £100,000 bond divided into 1,000 segments would result in each segment being worth just £100, providing much finer control over withdrawals and assignments. This enhanced granularity becomes particularly valuable when more precise amounts need to be withdrawn and reduces the amount that might need to be taken through an accompanying partial withdrawal.

For example, for higher-rate taxpayers looking to assign segments to family members in lower tax brackets, having more segments enables more precise capital gifting to ensure that gains transferred do not exceed the available tax bands. This segmentation strategy has become increasingly popular for funding university education or helping children purchase property, as their lower incomes and tax rates can substantially reduce the overall tax burden on bond gains.

To provide more client specific planning solutions, we will continue to allow investors to vary the number of segments at inception. This can be particularly useful for trust cases where the trust property is to be distributed equally between beneficiaries. For example, if there are three beneficiaries, rather than creating the bond using the default of 1,000 segments, it might make more sense to create 999 segments, allowing the three beneficiaries to receive identical numbers of segments.

Partial Withdrawals vs. Segment Surrenders: Understanding the Difference

Investment bonds offer two fundamentally different approaches to accessing capital: partial withdrawals across all segments or the full surrender of specific segments. These methods can produce dramatically different tax outcomes and understanding the distinction is essential for optimal planning.

With partial withdrawals, equal amounts are withdrawn from each segment, and investors can take up to 5% of their original investment annually for 20 years without triggering immediate income tax liability. This 5% allowance is cumulative, so unused allowances can be carried forward. However, when partial withdrawals exceed this allowance, a chargeable event occurs, potentially creating a tax liability. Importantly, the gain calculation bears no relationship to investment performance – it’s simply calculated as the withdrawal amount minus the cumulative 5% tax-deferred allowance.

Segment surrenders function entirely differently. When whole segments are surrendered, the chargeable gain is based on the actual segment value and the initial premium, accounting for any previous partial withdrawals. This method directly reflects actual investment performance rather than arbitrary withdrawal thresholds. For larger one-off withdrawals, particularly in the early years, surrendering whole segments often produces more favourable tax outcomes, and large proportional withdrawals should be avoided.

It should be remembered that surrendering segments has a knock-on effect to future partial withdrawals. The 5% allowance is based on the premium paid to each segment and as the segment number reduces so does the 5% allowance.

For more information on how investment bond gains are calculated using partial withdrawals or segment surrenders, please refer to our online guides which can be found on TOL under Information > Documents > Guidance Notes to Tax and the Transact Onshore/Offshore Bond.

All information is based on our understanding and interpretation of applicable law and regulation.

 

 

1. Introduction
2. TOL Recent Enhancements 
3. Smart Search To Help With AML
4. One-Off Pension Lifetime Allowance Statements
5. Integrations Make Transfers Complete Sooner
6. Rising Appeal Of Bonds On Transact
7. Transact – BlackRock: March 2025
8. A Study In Gifting: ‘Periodic Issues’
9. Getting The Most Out Of A Lifetime ISA
10. Maximising Investment Bond Flexibility And The Advantage Of Higher Segmentation
11. Interest On Cash
12. Transact Events 2025