Life Investment Bonds
Part 1 of this series of blogs dealt with fixed rate bonds available through banks and building societies whilst part 2 discussed corporate and government bonds. This final part explains the basics of life investment bonds.
An investment bond is a single premium investment with an element of life cover attached. The life cover is marginal and usually something like 101% of the value of the investment at the time of death. The Bond is predominantly an investment vehicle but the life cover makes it, under HMRC rules, a’ qualifying contract’ which affords the bond numerous tax advantages. These advantages mainly concern how, when and at what rate gains and withdrawals are taxed both whilst invested and on final encashment.
Investment Bonds are used primarily as a long term investment with the aim of generating capital growth, a regular income or a combination of the two.
Within the bond investor’s have a choice of where to invest their money with hundreds of different investment funds to choose from depending on their financial objectives.
One of the biggest advantages is the fact that HMRC deem basic rate tax to have been paid within the bond via the corporation tax that large insurance companies pay on their gains. This can mean that higher and additional rate tax payers will only ever pay basic rate tax, if for example, on encashment they have retired and are no longer higher rate tax payers.*
Other tax reliefs are available and in addition investment funds and the overall investment strategy can be changed quickly and without any tax charge.
Bonds are also often used in combination with trusts as they offer simple administration for the trustees.
Bonds can be owned on a single life, joint life or multiple life basis, depending on the investors requirements which again can offer numerous benefits over other types of investment vehicles.
Investment bonds should never be encashed without seeking advice first as there may be taxation consequences that investors are not always aware of.
If you would like to know more about this type of investment don’t hesitate to contact us here at FMB.
*Please note that the tax treatment depends on the individual circumstances of each client and may be subject to change in future also the value of Bonds can fall as well as rise and the client may receive back less than the initial investment amount.