An Ultimate Guide to Investment Bonds

An investment bond lets you grow your money for a good while, like 5-10 years or even more. But remember, like any investment, its value can go up and down, so you might not get back all you put in.

Investment bonds are usually seen as part of a life insurance policy. When you die, a part of your insurance money can be paid out. But really, they're more about investing your money. You can buy them from a life insurance company or through a financial adviser. They invest your money for you, aiming for it to grow until you take it out.

Some investment bonds may require you to invest for a certain time, and charges can vary depending on the type of bond you have. Usually, you can take out up to 5% of what you've invested each year without paying tax right away. However, tax rules might change, so how much tax you pay depends on your situation. At FOL Weath Investment Bond Advice London, we advise on all types of investment bonds and trust wrappers to meet your specific needs. 

Types of Investment Bonds

There are two main types: onshore and offshore. The main difference is how they're taxed. Onshore bonds are taxed by the UK, while offshore bonds come from outside the UK and might offer more fund choices.

There are other types too, like fixed-rate, corporate, and government bonds. Each has its benefits and risks, and how they're taxed can differ.

Onshore Investment Bonds

UK investment bonds are non-income generating investments, which means they're treated differently for tax purposes than other UK investments. The money in these bonds is taxed under UK life fund rules. Essentially, you're seen as having already paid some income tax at the basic rate on any gains. This tax isn't refundable.

But certain events, also called chargeable events, might happen while you have the bond, which could lead to owing income tax:

• If you die and the bond pays out
• If you transfer ownership of the bond (except as a gift)
• When the bond matures (only for certain types of bonds)
• If you cash in all your bond or policies

You can take out up to 5% of what you've paid each year without paying tax on it. But the gains might affect other tax credits you get. Different rules apply for life assurance bonds held by UK companies, and there are special rules for bonds held by trustees.

Offshore Investment Bonds

Offshore bonds are offered in places like the Channel Islands and the Isle of Man. Tax rules can vary depending on where you invest.

With an offshore bond, you don't pay tax on the investments in the fund, but there might be a withholding tax. This tax is taken from any interest or dividends received by the fund.

These bonds might grow faster because of the lack of tax, but it's not guaranteed. You'll pay income tax on any gains at your highest tax rate, which could affect other tax credits you get.

Top Slicing Relief for Gains on Onshore and Offshore Bonds

Top slicing relief can help lower the tax on profits from investments like bonds. It works by spreading out the tax over several years. You can get this relief if some of your income is taxed at a higher rate once you add in your investment gains.

If you're eligible for top slicing relief, it means you'll pay less tax on your investment gains when you cash them in. The calculations for this relief can be pretty complicated, so if you want to understand how it works, it's best to talk to our chartered financial adviser.

Fund Choices

At FOL Wealth Investment Bond Advice London, we work with big providers like M&G, HSBC Life, and Royal London. Get in touch to know more about how we can help.