Whole of Life Insurance Investment Bonds Explained

In Ashley Roberts-Clark’s (our Director’s) opinion, insurance investment bonds are probably the best, all be it lesser known, lump sum investment product available in the UK today.

When Investing Think Supermarkets …

If you walk into Asda, Morrisons, Sainsbury’s, Tesco or Waitrose you can buy Heinz baked beans, HP brown sauce and Hovis bread. 

• You may pay a different price, but they are the same product, and you simply walk out with your items in a different covered plastic or recyclable shopping bag. 

The same can be said for investments:

You can invest in Cash or Deposit funds, UK markets, US markets, European markets, Far Eastern markets, Emerging markets, Bond and Fixed Interest funds, Property funds and more.

• Each type of investment ‘wrapper’ or ‘shopping bag’, be that: a pension, an ISA, a general investment account, a unit trust, an investment trust or a life insurance investment fund can invest in all the same investment areas.
• It is simply that you have the same investment areas but inside a different shopping bag with a different set of tax rules.
• Pension wrapper tax rules are different to ISA tax rules, are different to general investment account tax rules and again, different to life insurance investment plans.

Tax Rules for Life Insurance Investment Bonds

• Life insurance investment firms do pay some taxes on the gains in the fund, but after expenses this could be around 10-14% but this then presents advantages for taxpayers with some taxes already deemed paid.
• You can withdraw up to 5% per annum of the original investment without creating any immediate tax liabilities.
• You can defer taking 5% pa and it rolls up.  E.g.  If make no withdrawals for 5 years or 10 years, you can withdraw up to 25% (5 x 5%) and 50% (10 x 5%) of the initial investment without an immediately liability to tax.
• You can withdraw more than 5% pa but this may then be a chargeable event subject to tax.  See top slicing tax calculations below.
• If you withdraw 5% pa of the original investment each year over 20 years you have then withdrawn 100% of your original investment amount back and the remaining balance is your capital growth.
• When you start to take part of the gain as withdrawals then you may be subject to taxes as follows using Top Slicing.

Top Slicing

• The total gain withdrawn is divided by the number of years you have held the investment (think of it as the profit per annum).  This is the ‘Top Slice’
• E.g., you make a partial encashment from your bond of £20,000 of which £10,000 falls within the 5% of original investment rules and £10,000 is excess over 5% rule i.e.  it is a chargeable gain.
• If you have had the bond for 10 years, £10,000 chargeable gain divided by 10 years = £1,000 pa profit (the Top Slice).
• Remember 20% basic rate income tax is deemed as paid as tax is deemed paid by the insurance company fund already.
• 20% Basic Rate Taxpayer:  £1,000 top slice profit pa is added to income, if this is still within basic rate tax band, there is no liability to tax on £10,000 gain as 20% Basic Rate Tax is deemed paid.
• 40% Higher Rate Taxpayer: £1,000 top slice profit pa is added to income, if this is above the basic rate tax band, there is a tax liability to tax on £10,000 gain at 20% marginal rate (as 20% Basic Rate Tax is deemed paid).
• 45% Higher Rate Taxpayer: £1,000 top slice profit pa is added to income, if this is above the higher rate tax band, there is a tax liability to tax on £10,000 gain at 25% marginal rate (as 20% Basic Rate Tax is deemed paid).
• Note:  if any of the top slice profit pa is spread over two tax bands then any taxes payable will be in proportion to the amount of gain in that band.

Advantages of Insurance Investments Bonds

• As can be seen from top slicing relief, if you are a higher rate taxpayer or above today, you can invest for today, take withdrawals of up to 5% pa for 20 years (if you choose) without any initial tax liability and if you then retire as a basic rate taxpayer, when it comes to ‘chargeable gains’ being withdrawn, there may be no taxes to pay.
• Assignment (Change Owner):  If you are a higher rate taxpayer, you may wish to plan for gifts to children to fund university fees or weddings or new cars or house deposits.
• The bond is then treated as if your child owned the bond from day meaning you have no tax liability and if you child is a non tax payer or a basic rate tax payer, they will have no liability to tax.
• Assignment (Change Owner):  To a trust for inheritance tax planning.
• The bond is then treated as if the trust owns it from day 1 and because it does not produce ‘income’ but usually only 5% pa original capital withdrawals if needed, there is no income tax on the trust (45%).  Your loved ones can then inherit on your death (after 7 years) no inheritance tax.
• Inheritance Tax Trusts:  Insurance Bonds are commonly used to invest to reduce inheritance tax using special inheritance tax trust vehicles:
• Discounted Gift Trust:  By using this trust, you may be able to reduce the value of your investments immediately/overnight to reduce inheritance taxes.  E.g.  You invest £100,000; it immediately has a reduced value of say £50,000 in your estate for IHT calculations but the value your loved ones inherit is still 100% of the value.  You have access to up to 5% pa withdrawals, but all the growth is already in trust for children.
• Inheritance Loan Trust:  By using this trust, you ‘lend’  to trust funds e.g.  £100,000 and continually have access to the original value of the bond (and can have it back/call the loan in at any time) but all the growth on the investment is immediately outside your estate for inheritance tax purposes.
• Financial Services Compensation Scheme Protection Limits:
• Bank and Building Society deposit protection = £85,000 protection.
• Investment company funds (ISA/OEICS/GIAs) = £50,000 protection.
• Insurance Investment Bonds:  Unlimited protection!  But capped at 90% of the total value of the bond.
• E.g.  £1m in an ISA, compensation if collapses = £50,000 protection, £1m in Insurance Bond = £900,000 protection.
• Capital Gains Tax Changes
  • Insurance Investment bonds are not subject to capital gains taxes and therefore are not affected by the reduction in the CGT allowance to just £3,000pa or any potential increases to CGT rates under the new Labour Government.
• Care Fees Means Test
• Pensions, ISAs, general investment accounts, bank accounts, property are all means tested for care fees.
• Trusts and Insurance Investment bonds (where no regular withdrawals have been taken) are not included in the care fees means test.

See Linked Videos:

Bond Top Slicing  Insurance Bond Assignment  Bonds v Collectives  IHT Loan Trust  IHT Discounted Gift  Bonds on Death  Care Fees Capital Not Means Tested

You now know why our director Ashley Roberts-Clark thinks insurance investment bonds are probably the best, all be it lesser known, lump sum investment product available in the UK today.

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