Capital Investment Bonds - Onshore

An investment bond is technically a single premium life assurance contract although the life cover aspect is only nominal. Bonds are collective investments in which the investments of many individual investors are pooled. This pooling enables relatively small investors to benefit from the economies of scale made available to institutional fund managers.

Investment Bonds terms will vary according to the investment selected, some may run for a fixed term whilst others are open ended, although a minimum 5 year term should be undertaken. You can usually withdraw some or all of your money whenever you need to, but a surrender penalty may apply if you do so in the early years.

A wide choice of managed, general and specialist funds are available offering investment opportunities in equity, property and fixed interest securities. The level of risk applicable to investment bonds will vary according to the investment funds chosen, bur you are normally able to switch between investment funds should circumstances dictate, and at a reasonable cost.

Although classed as single premium investments, ‘top up’ facilities are offered for further amounts to be invested either on a regular or ad-hoc basis, and regular monthly withdrawals can be taken to generate an income if needed. 

Whilst all gains and income earned within an investment bond are taxed at 20%, paid directly out of the bond by the insurance company, you can make withdrawals of up to 5% a year for up to 20 years without paying any additional tax immediately.

If you don't use your 5% allowance in a given year, the allowance is carried over to the following year – i.e. if you make no withdrawals in year one, you could draw up to 10% the following year without paying any tax at the time.

So if you're a higher rate or additional rate taxpayer, paying 40% or 45% tax on income in the current tax year, an investment bond can minimise your income tax bill.

However, your tax bill does not disappear entirely. Instead, the tax is deferred – and any additional tax due will be payable at the time you cash in the bond, or when it matures. All capital gains are treated as income at this point. Although tax at 20% has already been deducted, you may have an additional income tax bill if your gains push your income over the higher or additional rate tax threshold in the year they mature.

You are also able to hold these bonds offshore, which has different tax consequences.