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