InvestmentsMar 20 2018

Five questions you should ask about onshore bonds

  • To understand how advisers might be using onshore bonds.
  • To list the different tax treatments of onshore bonds.
  • To be able to explain the differences between onshore and offshore bonds.
  • To understand how advisers might be using onshore bonds.
  • To list the different tax treatments of onshore bonds.
  • To be able to explain the differences between onshore and offshore bonds.
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Five questions you should ask about onshore bonds

Onshore bonds have customer benefits and a role in financial planning, but advisers looking to use these will have to understand the tax treatment of onshore bonds. 

1) Firstly, what is an onshore bond and why are they used by IFAs?

Onshore bonds are life insurance policies which allow customers to invest a lump sum, and pay additional premiums, into a variety of available funds.

There is a notional level of life cover and no fixed term. Policyholder returns are calculated by reference to the performance of the underlying funds.

Bonds can be recommended for three main reasons: as a pure investment option, as part of retirement planning, or as an inheritance tax planning vehicle when used with a trust.

More details on how, and why, bonds are used are provided below.

2) What benefits can bonds offer customers?

Bonds offer customers a range of benefits, including: 

Control of outcomes: Investment bonds have no maturity date, allowing customers to decide when to sell their investment. Although the bond will pay out on the death of the life assured, it is possible to have multiple lives assured meaning the bond will not end prematurely.

Convenience and choice: The ability to choose from a wide variety of funds though a single ‘wrapper’ which can be switched with no tax or reporting considerations. Bonds can also offer access to investment ‘platforms’, offering greater flexibility and choice on the funds available.

Administrative simplicity: All transactions are consolidated and reported in a single statement and valuation.
If bond funds are held on a platform, they can be managed alongside other funds held on the platform.

Inheritance tax planning options: Bonds can be used in conjunction with a wide variety of trusts. To supplement income. Bonds offer tax-efficient withdrawals with flexibility on how this is taken.  

Tax planning: The ability to time when tax is payable through the use of multiple lives assured. 

3) How are UK onshore bonds taxed?

Bonds are taxed under the chargeable event legislation, which means gains by a policyholder are assessed to income tax rather than capital gains tax.

While the premium is invested, the bond pays corporation tax which is assessed and deducted by the life company issuing the bond.

The actual rate paid within the fund will vary, but the policyholder is deemed to have paid tax in the fund at a rate equal to 20 per cent, even where the rate is actually lower.

HM Revenue & Customs (HMRC) regards this as equivalent to the bond policyholder as having paid capital gains tax (CGT) and basic rate income tax.

Offshore bonds tend to have higher charges which may impact on the overall net return in the long run. 
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