Investment Bonds are usually treated as a single-premium life insurance policy, but fundamentally they are an investment product. They are often seen as an attractive planning opportunity because any investment growth is allowed to roll-up within the Bond, and 5% of the original investment can be withdrawn annually without any immediate tax implications. However, there are important tax considerations, especially where the Bond is held within Trust.
A Chargeable Event Gain can arise on certain events, such as on the surrender of the entire Bond or individual policies, on transferring legal ownership or on death. The Gain is subject to Income Tax, with a basic rate tax credit available for UK policies.
Top Slicing Relief can also reduce the amount of tax payable on Chargeable Event Gains in certain situations, e.g. where the Gain pushes an individual into a higher rate of tax. However, calculating this relief is complicated and HMRC’s computations are not always correct, as evidenced by recent cases going through the Courts.
Where Bonds are held within a Trust, special rules determine what tax rate applies to Chargeable Event Gains and who is assessable. This can be affected by various factors, for instance the type of Trust, whether the Settlor of the Trust is alive or not and their residence status, and whether the policies are assigned to a beneficiary before being surrendered. If the Trust is non-UK resident, there may still be UK tax implications to consider.
The new Trust Registration Service requirements may also apply for Bonds written into Trust (see our blog post here).
It is important to take advice before doing anything that may trigger a Chargeable Event Gain; it may be possible to mitigate potential tax charges. Please contact us if you require assistance.
