One of the key benefits of a bond is that it is considered a ‘non-income producing asset’. Income and gains are assessed on the UK insurer rather than the bond holder. There is only a tax event for your client when there is a chargeable event and potentially an income tax liability, for example when a policy is surrendered, withdrawals above the 5% withdrawal allowance or the last life assured dies.
Onshore bonds are subject to a charge for the UK corporation tax on interest and capitals gains the insurer has paid. To reflect this, the bond holder is given a 20% income tax credit on any chargeable event gain – reducing the personal income tax due on encashment.
With a GIA, where income is generated every year, any amounts in excess of personal tax allowances will create an income tax liability. In addition, a CGT disposal occurs every time you sell some or all of the investment – such as withdrawals, fund switches, and rebalances. With the reduction in annual CGT and dividend allowance thresholds, this means more people will be paying tax on these types of investment for the first time.
For those clients paying tax above 20% on investment income or gains, a bond might help to improve the net returns you achieve for them.