Investment Bonds

Investment bondsI have been looking at the taxation of investment bonds. Investment bonds are life insurance policies and have a different tax treatment from other investments. This can lead to some valuable tax planning opportunities for individuals.

There is no personal liability to capital gains tax or basic rate income tax on proceeds from your bonds. This is because the insurance company pays the tax on the income and capital growth generated by the money held in the bond.

You can withdraw up to 5% each year of the amount you have paid into your bond without paying any tax on it. This allowance is cumulative so any unused part of this 5% limit can be carried forward to future years. Remember that the total withdrawn cannot be greater than the amount paid in, otherwise there will be tax consequences.

If you are a higher or additional rate taxpayer now but know that you will become a basic rate taxpayer later maybe as you get older and are able to retire, then you might consider deferring any withdrawal from the bond until then. That is the excess of the accumulated 5% allowances. If you do this, you will not need to pay tax on any gains.

You need to review your tax position carefully, before withdrawing any money, as the gain could put you in the higher rate tax bracket. Remember, you are only taxed on the gain. The insurance company should have given you a notice of a chargeable event arising for you to notify HMRC of the gain.

HMRC will then assess if there is any income above the basic rate for you to pay. As basic rate income tax is already paid, the maximum rate of tax that could become payable is the difference between the higher rate and the basic rate.

Always speak to a financial advisor before considering investing.

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