Why use an Investment Bond in a Trust?

By Rachel Efetha, Chartered Financial Planner.

This article explains investment bonds, their common use in trusts, and why you might consider incorporating an investment bond within a trust.

What is an Investment Bond?

An investment bond is a single-premium life insurance product designed primarily for investment purposes, though it does include a life insurance component. These bonds can be held onshore or offshore, each with distinct tax treatments which we will explore later.

Investment bonds are popular as investment wrappers due to their flexibility and straightforward administrative requirements, especially when used within a trust.

Why use an Investment Bond?

Typical investment products are subject to tax within a trust. If there is a gain and the trustees withdraw part of the investment, a tax return must be filed. However, investment bonds offer a 5% tax-deferred allowance (TDA) annually, which can be carried forward throughout the bond’s life. This allows for the withdrawal of up to 5% of the initial investment each year without immediate tax implications, regardless of the bond’s performance.

If a trust beneficiary requests a withdrawal within the 5% allowance, it can be executed without triggering immediate tax or requiring a tax return.

Leveraging the TDA

The 5% TDA of an investment bond accumulates annually. If trustees must withdraw more than the accrued allowance, any gains are taxed at the settlor’s marginal income tax rate.

Additionally, investment bonds can be segmented and assigned to beneficiaries. If distributions exceeding the 5% entitlement are required, trustees might consider assigning portions of the bond to the beneficiary. In such cases, any taxable gains are assessed based on the beneficiary’s tax situation rather than the settlor’s, potentially reducing income tax liabilities.

Because investment bonds do not generate income or require tax return submissions, they are a favoured option for trustees looking to minimise the administrative burden and ongoing costs of managing a trust.

Onshore Investment Bonds

Gains on onshore investment bonds are considered to have already paid 20% tax over the bond’s lifetime. Consequently, if the gains keep the settlor’s income within the basic tax rate bracket, no further tax is payable upon surrender.

Offshore Investment Bonds

Offshore investment bonds do not have tax paid at the source, meaning the full rate of tax would be due in the event of a chargeable event. To mitigate this, segments of the bond can be assigned to a non-taxpaying beneficiary, thereby avoiding any tax charges on the bond.

This example illustrates how investment bonds can be used within a trust and should not be considered financial advice. For professional guidance on investments and other financial planning aspects, why not contact us at Anstee & Co. to find out more?

How Anstee & Co can help you with an Investment Bond

We are a firm of Independent Financial Advisers (IFAs). This means that the financial advice we provide to you is unbiased.  Why not arrange a meeting to see how we can help you? The initial meeting is at our cost and is without obligation. Meetings can be arranged at a time and location that is convenient for you.

Our Head Office is located at

• Kettering, Northamptonshire

Additionally, our financial advisers live and make use of meeting rooms in

• Bedford, Bedfordshire
• Market Harborough, Leicestershire
• Northampton, Wellingborough and Thrapston in Northamptonshire.

Our expertise covers all aspects of financial planning including pensions, investments, and mortgages.

If you have any thoughts or comments on this article, “Why use an Investment Bond in a Trust?”, then, it would be great to hear your views.

Finally, the information contained in this article is for information purposes only and does not constitute financial advice. No action should be taken based on this information alone. Anstee & Co is authorised and regulated by the Financial Conduct Authority (FCA).