Investment bonds may have lost their sparkle in recent years, but they can still be a very useful tool for advisers – the key is the tax rate on exit.
Get started with MM’s top tips for using the tax advantages of investment bonds.
1. Plan withdrawals to take advantage of deferrals. Policyholders can withdraw 5 per cent of the original investment per policy per year, up to 100 per cent of the original investment, until a ‘chargeable event’ occurs – details of which are outlined in the tax spotlight on investment bonds.
2. Remember to use top-slicing relief. This means that, if a bond has been held for a number of years, the policyholder is not disadvantaged by taking all the gain at once. It is useful when adding the full gain to the policyholder’s taxable income would push them into a higher-rate tax band.
3. Take care with partial surrenders. A chargeable gain can be triggered if more than the 5 per cent annual allowance is exceeded. It is possible to remove any tax liability by surrendering the entire policy before the end of the policy year, with the gain then calculated based on growth since inception.
4. Consider segmenting bonds. Arranging a bond in £100 or £1,000 chunks can be an efficient way to surrender portions of the bond, allowing minimisation of tax charges.
5. Assignment of a bond via gift does not trigger a chargeable event. The entire chargeable gain calculation is passed over to the assignee, including any partial withdrawals.
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