This is the third in the series of tax wrapper articles I’ve written. Check out my LinkedIn page for a copy of my first and second Tax Wrapper article about pensions and Stocks and Shares ISAs.
A Tax Wrapper is a beneficial structure provided by the UK Government which you can wrap around your savings and investments. These wrappers effectively shield your money from taxes that you would otherwise have to pay.
The Tax Wrapper I would like to talk about this week is the Investment Bond:
- Investment bonds allow withdrawals of up to 5% of the original investment per yearfor 20 years without immediate tax charges. The tax is deferred and becomes payable when the bond is cashed in or matures. That deferral is very helpful to the Investor because the tax has not been paid and is allowed to generate further growth. Furthermore, it’s also helpful for higher or additional rate taxpayers as they may choose to wait until retirement when the amount of tax they must pay may fall, or they may hold the investment until they die, whereupon any Capital Gain is wiped clean.
- Within the Bond, any growth and gains* are not subject to Capital Gains Tax but instead subject to a life fund tax rate of 20%, so this will particularly benefit a higher or additional rate taxpayer. In other words Investment Bonds offer tax deferral on growth until a chargeable gain occurs.
* the value of an investment can go down as well as up.
- When a chargeable event happens, the entire gain is taxed in that tax year, so when it does, Top Slicing Relief may be available when some of the gain is subject to higher or additional rate tax, so only tax is paid on the difference between tax paid on the full gain and tax paid on the average gain (or “slices”).
- An Investment Bond can be assigned to someone else and redeemed following the Policyholder’s death as a way of avoiding Inheritance Tax.
- An Investment Bond may be overlooked by a Local Authority when assessing whether a person has sufficient capital to be able to pay for their own care in a Care or Nursing Home.
In conclusion, using tax wrappers with your investments can save you a significant amount of tax and really boost the growth of your capital.
If you have any queries about Investment Bonds then feel free to telephone me or face time me- I’m happy to help! Look out for my fourth and final post about Tax Wrappers next week!
Russell Blackhurst Llb dip PFS
Lazenby’s Financial Services
