Onshore Investment Bonds
Also known as Single Premium Unit-Linked Life Assurance bonds, Onshore Investment Bonds allow you to invest in any or all of the key asset classes; cash, fixed interest instruments, commercial property, UK and overseas equities.
Investing within an Onshore Investment Bond will not create a personal liability to either Income Tax or Capital Gains Tax during the lifetime of the bond on the proviso that withdrawals do not exceed HM Revenue and Customs limits. Under current legislation, you are allowed to withdraw up to 5% of the original investment amount each year without any immediate personal tax liability. This allowance is cumulative, so if no withdrawals are taken until the fifth year then up to 25% of the original investment can be withdrawn without any immediate personal tax liability.
Withdrawals in excess of 5% of the initial investment, on full surrender or in the event of the death of the bond owner will however trigger a chargeable event. For higher and additional rate taxpayers when such an ‘excess’ withdrawal is made there will be a tax charge at either 20% (higher rate) or 30% (additional rate) having accounted for the tax treated as already paid within the fund.
When a chargeable event does occur any gain is added to the investor’s income and taxed according to their individual personal tax position. Age related personal allowances for plan holders aged 65* or over can be reduced by on full or part surrender of an investment bond where income plus the whole of the chargeable gain exceeds £25,400 for the 2012/13 tax year. Income in excess of this figure is reduced by £2 for every £1 of taxable income. Once taxable income exceeds £30,190 for those aged between 65 & 74 and £30,510 for those aged 75 and over the Standard Single personal allowance of £8,105 less any other notification issued to the client by HMRC will apply.
No withdrawals from the bond will be taken into account for capital gains tax purposes since the fund itself will already have paid tax on such investment gains.
Onshore life policies benefit from preferential tax treatment. Fund switches undertaken within an Onshore Investment Bond, which may be made to alter an initial investment strategy, will not be deemed to be a disposal of assets and will not therefore be subject to Capital Gains Tax. Instead, on the eventual disposal of the bond, any capital gain will be ‘top-sliced’ and subject to Income Tax rather than Capital Gains Tax.
*Note Age related personal allowance for the 2012/13 tax year is £10,500 for those aged between 65 and 74 and £10,660 for those aged 75 or over. These rates will be frozen from 2013/14 until such time they reach the level of the standard allowance. Anyone attaining 65 years of age after 6th April 2013 will not be able to claim age related personal allowance.