Five questions you should ask about onshore bonds

Of course, in both cases, opportunities may exist to gift (assign) the bond, or segments, to a spouse or child who may be in a lower tax bracket, prior to surrender. 

Both onshore and offshore bonds can benefit from top-slicing relief when calculating tax. In onshore bonds, after the first partial withdrawal that is a chargeable event, for subsequent partial withdrawals that are chargeable events the gain is top-sliced by dividing it only by the number of full years since the previous chargeable event.

For total withdrawals the gain is divided by the number of years since the start of the policy.

For Offshore bonds issued before 6 April 2013 the period of time is always the full number of years the bond has been in force.

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

Dividend Allowance changes 

For the tax year 2018/19 the government announced plans to reduce the dividend allowance to £2,000. The £3,000 reduction in the dividend allowance from the original £5,000 will affect clients with direct collective investments holdings that pay dividends.

In contrast, dividends from funds held within an onshore bond are not subject to income tax, which means this could potentially support higher, more tax-efficient returns for the end investor.

Moreover, onshore bond investors do not need to provide tax return details until a chargeable event arises.

5) How are bonds used in financial planning?

Bonds have a number of uses in financial planning:

As an investment option: They form part of a financial adviser’s product suite to provide holistic financial planning recommendations. They offer a complementary tax efficient investment solution alongside Oeics and Investment Isas. Isas are more tax efficient, but have investment limits.

Oeics are subject to the capital gains tax regime and can therefore benefit from the annual CGT allowance (£11,300 in 2017/18) but any ‘natural’ income such as distributions will be are assessable for income tax each tax year and must be reported, even if the distributions are reinvested within an accumulation share class. Bonds offer the tax and other benefits noted above.

Offshore bonds tend to be advantageous to clients who intend to use their funds when they are overseas and therefore may not be liable to tax in the UK.  

As part of retirement planning: With reductions in annual contributions and lifetime limit, a bond can be a very useful vehicle when used in conjunction with pensions for retirement planning.