Investment Bond
Investment Bond
Investment Bonds are single-premium investment contracts issued by life insurance companies. An investment bond is a way of putting your money into a fund or funds over the long term that will, hopefully, give you back more than the interest you would earn on a bank or building society account. The bond itself is just a framework; your money is actually invested in funds commensurate with your attitude to risk.
Taxation
When investment bonds are en-cashed, the profits made are taxed as income rather than capital gains. HM Revenue & Customs deem that basic rate income tax has already been paid at a rate of 20%, so basic rate taxpayers may have no further liability. Non taxpayers cannot reclaim the tax already paid. Basic rate tax payers have no further income tax liability as long as the gain added to the taxpayer's total income for the year does not push them into the higher rate tax bracket. Higher rate and additional rate taxpayers may have more tax to pay.
The 5% rule
Up to 5% income from the original investment can be taken from an Investment Bond each year for 20 years without incurring an immediate tax liability. Also, if 5% is not taken at the beginning of the Bond's life, it can be rolled up on a cumulative basis – e.g. if 5% of the original investment is not taken in years 1 to 3, then 20% of the original investment can be taken in year 4 (3 x 5% + 5% for the current year) without an immediate tax liability.
A Bond is treated as a ‘non income producing asset’ which means that income derived from any such investment does not have to be accounted for on your tax return provided it remains within the 5% pa limit.
Investment Bonds provide only nominal life cover, usually, and are treated as investment vehicles. Typically, life cover is 101% of the bid value of the units attached to the policy at the date of death.
The 'umbrella' structure of a Bond enables switches between funds without incurring a taxable event and, usually, with little or no switching charge.