UK LIFE POLICY TAXATION/TAXATION OF LIFE POLICIES/LIFE POLICY TAXATION
Synopsis: It’s not often you see a favourable article on investment bonds, but there is one in the latest version of Investor’s Chronicle.
Date posted: Thursday, May 28, 2015
Investment bonds have regularly received unflattering press coverage, often harking back to the level of commission which used to be on offer. Since RDR, the commission bias aspect has fallen away, but even so, it is rare to see press comment singling the potential benefits of investment bonds. However, in the Investor’s Chronicle published on 22 May, there was a two page article headed ‘Pay less tax with onshore bonds’.
The article contained nothing new, but was nevertheless a reminder of where onshore bonds can have a role:
• They are suited to those investors who have run out of the main tax-efficient investment offerings – ISAs and pensions – and probably have also little or no CGT annual exemption remaining.
• Bonds can be gifted via assignment without creating a tax charge, whereas gifts of collectives could incur CGT.
• Time apportionment relief of gains applies to new UK policies (following a change effective from 2013/14) for those beneficial owners who have a period of non-UK tax residence.
• Investment bonds with a life assurance element are currently disregarded in means-testing of capital for long term care, provided there are no issues of voluntary deprivation.
• Top-slicing is not a feature which applies to capital gains tax: a large gain may be top-sliced to basic rate (and hence no liability) via an investment bond, whereas the alternative might be some 28% CGT via a collective.
• As life policies, investment bonds have FSCS cover of 90% without limit, which compares with the cover for non-life policy investments of a maximum of £50,000 per person per company.
By coincidence the article echoes some work which we have been undertaking, using a modified version of the wrapper tool. This showed that while the collective + ISA combination was generally the most tax-efficient option, once the ISA and CGT annual exemptions were exhausted, investment bonds started to gain traction as tax shelters.
The article is a useful reminder that a single solution is not always the right one. When using our wrapper tool for large sums, it can be worth looking at the option of splitting the investment into two parts, with the investment bond taking the upper element.
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