Guide to investment bonds

An investment bond gives you the potential for medium to long-term growth on your money, over 5-10 years or more, along with fund management expertise. You also get access to a mixture of funds, which are looked after by professional investment managers. Of course like any investment, the value can go down as well as up so you might not get back what you put in.

Investment bonds are usually classed as a single premium ‘life insurance’ policy because a portion of your ‘life insurance’ policy can be paid out upon death, but they're really an investment product. So if your need is solely for life insurance, you might want to research other more tailored options. 


That said, you usually buy an investment bond from a life insurance company, or directly through a financial adviser. They will invest your premium on your behalf for potential capital growth, which should build up until you withdraw money from your policy.

Some investment bonds may require a minimum investment term and apply charges for cashing in early. There may also be a minimum investment amount that may range typically between £5,000 and £10,000.

You can withdraw up to 5% per year of the amount invested without paying any immediate tax.

Types of investment bonds

Investment bonds mainly fall into two categories, onshore and offshore. The main difference is their tax treatment. In high-level terms, those onshore are subject to UK corporation tax, which is offset by your provider, while offshore bonds are issued from outside the UK and the returns roll up gross of tax in the funds, apart from Withholding Tax, as described below. Offshore bonds may also offer a wider choice of funds. 

Other common types of bonds include fixed-rate bonds, corporate bonds and government bonds. Each have their own benefits and risks and the tax situation of each can vary. 

Onshore investment bonds

UK Investment Bonds are non-income producing investments and so have a different tax treatment from other UK based investments. This can provide valuable tax planning opportunities for individuals.

The funds underlying the bond are subject to UK life fund taxation meaning that you're treated as having paid Income Tax at the basic rate on the amount of your gain. This notional tax is not repayable in any circumstances. You will have no liability to Capital Gains Tax or basic rate Income Tax on bond gains.

Certain events, also known as chargeable events, that can occur during the lifetime of your onshore investment bond may trigger a potential Income Tax liability:

  • Death giving rise to benefits.
  • Transfers of legal ownership of part or all of the bond (though not gifts).
  • On the maturity of the bond (only applies to Capital Redemption bonds).
  • You cash in all your bond or individual policies within it.

You can withdraw up to 5% each year of the amount you have paid into your bond without paying any immediate tax on it, more information on this here.

As you're treated as having paid basic rate tax on the amount of the gain, the maximum rate you would be liable for is the difference between the basic rate and your highest rate of income tax for the relevant tax year. The gains may also affect your eligibility for certain tax credits and you could lose some or all of your entitlement to personal allowances. 

If you're a higher or additional rate taxpayer now but know that you will become a basic rate taxpayer later (perhaps when you retire for example) then you might consider deferring any withdrawals from the bond (in excess of the accumulated 5% allowances) until that time. If you do this, you may not need to pay tax on any gains from your bond.

Life assurance bonds held by UK companies fall under different legislation.

Special rules apply to trustee held bonds.

Offshore investment bonds

Offshore is a common term that's used to describe a range of locations where companies could offer customers growth on their funds that's largely free from tax. This includes "true offshore" locations such as the Channel Islands and the Isle of Man, and other locations such as Dublin. Tax treatment can vary from one type of investment to another, and from one market location to another.

Offshore investment bonds are similar to UK investment bonds, as chargeable events occur on the same events described above for onshore bonds but there is one main difference. With an onshore bond, tax is payable on gains made (and investment income received) from the underlying investments of the life fund(s) invested in, whereas with an offshore bond no income or Capital Gains Tax is payable on the underlying life fund investments. However, there may be an element of Withholding Tax that can't be recovered. Withholding Tax is deducted from interest and dividends received by the fund(s).

The lack of tax on an offshore bond means that potentially it could grow faster than one that is onshore, although this isn't guaranteed and the effect of other factors, such as charges, need to be taken into account in any comparisons. But, note that you will pay income tax on any gain at your highest marginal tax rate. This is because on an offshore bond you're not treated as having paid basic rate tax on any gain. The gains may also affect your eligibility for certain tax credits and you could lose some or all of your entitlement to personal allowances.

Top slicing relief for gains on Onshore and Offshore bonds

Top slicing relief is generally available where at least part of your income would be liable to a higher tax rate once you include a gain. If a gain doesn’t move you into a higher tax rate, there may still be some top slicing relief available due to the effect of the personal savings allowance nil rate and the starting rate for savings.

If top slicing relief applies, you may get a reduction on the tax payable on a chargeable event gain. HMRC have a process for calculating this which can be very complex, so if you would like to understand how this works, please speak to your financial adviser.

Taking withdrawals from the bond

An investment bond could therefore be a potentially tax-efficient way of holding a range of investment funds in one place.

You can withdraw up to 5% each year of the amount you have paid into your bond without paying any immediate tax on it. This allowance is cumulative so any unused part of this 5% limit can be carried forward to future years (although the total cannot be greater than 100% of the amount paid in). You will often see this referred to as the "5% tax-deferred allowance".

However, if you decide to take more than the accumulated 5% tax-deferred allowance, you will create a gain equal to the amount taken over the allowance. Your insurance company will send you details of the chargeable event gain arising for you to notify HMRC of the gain, and, you may be subject to Income Tax.

Fund choice

When you invest in a bond you will be allocated a certain number of units in the funds of your choice or those set out by the conditions of the bond. You can choose to invest in a range of funds, a portfolio, or a mixture of both. You can also usually switch between funds within your bond. However, there may be a charge for this.

Each fund will invest in a range of assets, such as fixed interest, shares and property, and the price of your units will normally rise and fall in line with the value of these assets. If invested in a diverse range of assets then there is potential to weather the storm of any changes in the market that could affect the value of your investment.

To find out about the fund choices available on our investment bonds, see the investment products section.

Further information

If you need more information on bonds, please speak to a tax specialist or contact a financial adviser. Information is also available on the gov.uk website and on our Tax and Allowances webpage.

We are not recommending one option over another or providing advice.

Because tax rules can change, the impact of taxation (and any tax relief) depends on your individual circumstances. 

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