An investment bond is 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 together. This pooling enables relatively small investors to benefit from the economies of scale made available to institutional fund managers. Investment bonds do not have a maturity date and stays invested usually until death or encashment.
A wide choice of managed, general and specialist funds are available offering investment opportunities in equities, property and fixed interest securities. Bonds enjoy the facility to switch between these internal insurance company funds normally free of charge and with no immediate tax consequences if desired. 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.
The underlying funds of Investment Bonds are subject to tax on income and gains. Any 'income' you need is achieved by selling units. Current legislation allows 5% of the capital to be withdrawn for up to 20 years with no immediate liability to tax. Withdrawals in excess of 5% are only taxable if they take you into the higher rate tax band. This makes them useful for higher rate tax payers who expect to become basic rate taxpayers in future, for example at retirement.
Investment Bonds can also be held offshore and many funds are operated by subsidiaries of well-known onshore institutions. Such funds are able to offer a wider range of investments than their onshore counterparts owing to the differing regulation offshore. Income distributing funds pay their income gross which is particularly attractive to non-taxpayers.
An offshore investment is one which is held, literally, offshore, i.e. not under United Kingdom jurisdiction. If you invest in an ‘onshore’ bond then the fund manager will be liable to pay certain UK taxes on the underlying fund, which as well as being non-reclaimable, will also hold back the growth of your investment. An ‘offshore’ bond is liable for no UK tax and therefore grows virtually tax-free at a potentially higher rate.
Offshore investment bonds do not generate income and hence generate no UK tax liability until the proceeds are brought back onshore. That is not to say that you can necessarily avoid paying UK tax. You may still find you will have to pay some but, with careful planning, you can control when you pay.
If you are living abroad currently, or you plan to move abroad during the life of your investment, you may well object to paying UK-based taxes, especially as these are non-recoverable, and therefore an offshore bond enables you to invest without any liability to UK taxes.