The Name’s Bond, Investment Bond

The Name’s Bond, Investment Bond by Rachel Naulls

As many of you are aware, from time to time we ask our staff members to write articles for us. This week it is the turn of Paraplanner, Rachel Naulls, who has created an interesting piece about Investment Bonds as explained to a very intriguing layman… Take it away Rachel!

Your circumstances will not be the same as those in this example and therefore the solutions will not be suitable for your own individual needs. You should always speak to a financial adviser when considering an investment bond, placing this in trust and when considering your tax position.

Shock swept across the ground floor of the Informed Financial Planning office as James Bond came through the front door. He’d requested a meeting with one of our advisers to discuss investments that he was adamant were named after him.

James had been thinking for a while now about leaving money to his colleagues and wanted to do this in a way that would alleviate as much tax as possible but give him the control he craves.

He has recently set up the James Bond Discretionary Trust via a solicitor with himself and M as the trustees. He wants the money to be for the benefit of Miss Moneypenny and Q when he passes away.  

James had heard of the terms onshore and offshore but was unsure as to what the differences between them are.

The term onshore means that the investment is subject to UK tax and is based in the UK. Offshore therefore refers to any investment based outside of the UK, such as in Ireland, the Isle of Man or further afield. As Onshore bonds are based in the UK, the underlying funds are subject to a tax charge of nearly 20%. This is paid internally therefore the policy holder will never have to physically pay that tax themselves, but this reduces the amount of growth available.

Offshore bonds are the opposite, they do not have any ‘internal tax’.

When taking withdrawals from a bond, the funds are added to your income and will be taxed at your marginal rate. However, as 20% tax has already been paid by onshore bonds, 20% will be deducted off the tax charge. This however is not the case for Offshore. The table below details this;

The Name's Bond, Investment Bond - Informed Financial Planning

Seeing this, James thought it was obvious which bond he should choose, however it was highlighted to him that he wanted to set this bond up under trust. The taxation of trusts can become rather complex and by setting up an onshore bond, he would have to complete a tax return every year. By going offshore he will not pay any internal tax and will not have to complete an annual tax return.

James was impressed by this investment and questioned whether he could set up more than one. We confirmed that he could and he decided that he would like to hold one for himself, not in trust.

His main objective is to achieve investment growth and take a tax efficient income on a regular basis. James asked whether an investment bond would facilitate this and was delighted to know that it could.

If James invests £100,000 into an investment bond, he can withdraw up to 5% of this initial amount each policy year without incurring any tax. This means that he could withdraw £5,000 and not pay any tax. However, this is not tax free, rather tax deferred as this is considered a return of capital. If James decided to take £10,000 in the first year he would face a tax charge on the additional £5,000. However, if he waited until the 2nd policy year he could withdraw the £10,000 without facing a tax charge at that time.

With careful planning James will be able to take an income below his 5% allowances and not pay tax until these allowances run out. He will only receive 20 years’ worth of allowances (100% of his original investment) and anything withdrawn over this amount will be taxed at his marginal rate.

James was impressed by these investments and the many different variations. He left our office with a greater understanding of these bonds and eager for his financial planning report containing more information and a thorough recommendation.

If you need financial advice on your investments, be sure to give us a call on 01482 219 325 or email [email protected]!