Are bonds the answer in the current tax landscape Q&A
Last Updated: 16 May 24 10 min read
Bond Matters
Q. Thinking about the CGT exemption this year and the zero exemption next year, what approx. max level should clients hold in OEICs for tax efficiency before looking to bonds now?
A. Please ask your usual contact to demo the Tax Wrapper Comparison Tool
Q. What about the loss of allowances due to gross gains being added to existing income?
A. It’s true that total bond gains rather than top sliced bond gains are included in adjusted net income but a withdrawal within 5% limits for example would not give rise to a gain.
For the record, Adjusted Net Income is total taxable income before personal allowances and less certain tax reliefs (e.g. gross gift aid donations and gross pension contributions) and is used for loss of personal allowance and high income child benefit charge purposes amongst other things.
Whether or not that potential undermines the decision to use a bond or not would be circumstance specific.
Q. Typically what % level would the bond provider pay corporation tax?
A. That depends on how the life fund is constituted and so not possible to generalise. Please note though the question below re average tax paid within a Pru bond
Q. Is there a way to avoid realising current gains to move funds to a bond (would an in specie transfer be possible)?
A. No that would still give rise to Capital Gains tax implications
Q if assigned, what is the initial investment value for the new owner?
A. The new owner inherits the history of the bond as if he/she has always been the owner
Q. Sorry basic question but is there ever a time where extra funds are encashed to pay tax within the bond?
A. That could happen but then the gain is further increased!
Q. Should a bond be set up on a lives assured or capital redemption basis. Are there scenarios / circumstances that are better / worse for each way?
A. Remember firstly that capital redemption is only available offshore. The applicant could be an individual, trustee or corporate. If there is a desire to keep the bond running and not pay out on death then capital redemption may be the answer.
Q. If a Ltd company holds an Onshore Bond and fully encashes in first year, what tax would apply to the gain made.
A. Depends on their rate of corporation tax - have a read at our corporate investing pages.
Q. Is there not a small additional benefit for onshore bonds as a result of any higher/additional rate tax being calculated based on gain net of BRT?
A. Broadly within a UK life fund, income is taxed at 20% and that is as expected given that onshore bond investors are treated as having suffered tax at 20%. But, UK and overseas dividends received within a UK life fund are tax exempt and that drives down the effective rate to a rate below 20%. As this reduces the effectives rates of tax to below 20, 40 and 45% there is an advantage to onshore bonds for taxpayers on encashment.
Q. How can you structure the investment within a bond so it generates higher dividends to take advantage of the preferential taxation?
A. It’s a matter of research but remembering not to let the tax tail wag the investment dog!
Q. Do you have anything to confirm actual tax paid within a Pru Bond averages 14/15/% over recent years ?
A. The event recording and this! It’s been around 14.5% on average over the last 22 years for the life fund that backs the smoothed funds.
Q. If a Bond is fully encashed - no gain was made (i.e. it was worth less due to investment reduction) kindly confirm there's no tax to pay/implications and there's no Chargeable gain cert
A. You are correct. For the record, There is no relief under the chargeable event regime in any circumstances for an investment loss sustained on a bond. Neither can a loss on one bond be set against a gain on another.
Q.Onshore gains come later in the order of taxation, can someone with £12,000 NSI, £4,000 divis and £2,500 onshore bond gain still offset the gains against the 0% SR as well as the PSA?
A. Plug your sums into the tax relief modeller, some savings allowance will be available but as the tax credit is not needed it may offset some of the dividend tax.
Q. If you have 5 adult children could you have them all as sum assured on the policy to potentially avoid IHT?
A. That wouldn’t avoid IHT. Onshore Bonds tend to have a maximum of 2 lives assured. An offshore Bond could probably accommodate 5 but an offshore capital redemption bond might be more appropriate?
Q. Full surrender of Onshore Bond - Can you clarify the "new" chargeable event calculation?
A. Not sure about “new” but there is a full surrender gain if amount paid out plus any previous capital payments, exceeds total premiums paid plus total gains on previous part surrenders or part assignments.
Q. Client with Offshore Bond (SJP International). Held since 13th august 1993. Original investment was £78,000 (original investment amount already withdrawn. Now valued at approx £380,000. Client wants to change provider. Has to be fully encashed? Any reinvestment relief etc available?
A. There is no reinvestment relief. There is insufficient information but there may be scope, tax mitigation wise, to encash segments over more than one year (if bond is segmented) and perhaps consider outright gifts of segments to spouse/civil partner who may also then choose to encash?
Q. Are bonds excluded from care fee assessments?
The treatment of investment bonds can be complex. This is in part because of the differing products that are on offer. As such, local authorities may seek advice from their legal departments. In saying that, guidance tells us that the surrender value of any life insurance policy must be disregarded. A capital redemption bond is not a life insurance policy though.
There should be a substantive reason for a recommendation to invest in an insurance bond that is not putting the capital beyond the reach of the local authority's means test. If all or part of the recommendation is on the grounds that the capital would be disregarded then this is likely to be considered deliberate deprivation of capital and as such the amount would get brought back into account.
Deprivation of assets means where a person has intentionally deprived or decreased their overall assets in order to reduce the amount they are charged towards their care.
Trust Matters
Q. IIP Trusts - Is there any legal way of a Bond being used that subsequently pays regular "income" to a beneficiary?
A. Yes. If the trust deed gives the trustees power to advance capital then regular payments to the income beneficiary by way of advancement of capital may be a solution. Also, if it is a larger trust fund then there could be two investments – OEICs to generate income for the income beneficiary and a bond for capital growth purposes for the other beneficiaries. If you need help, then you can forward a copy of the deed to your usual contact and request it is passed to the technical team for review.
Q. Where the settlor sets up an absolute Trust for a life assured, on encashment, does the settlor pay the tax or the live assured?
A. Chargeable event gains will be taxed on the beneficiary unless the settlor is alive and the settlor is a parent in which case the parent is taxable on gains over £100 if the child is under 18. Remember that the £100 rule does not apply to a grandparent/grandchild scenario.
If it’s a Bare will trust then the child will automatically be taxable as the parental settlement rules can’t apply.
With regard to Discounted Gift trusts, just be aware that with a bare DGT, assessing the chargeable event gain is relatively complex where a chargeable event gain arises in situations other than in the tax year following that in which the donor dies.
Q Do Pru M&G offer deed appointment deeds for > 18 yr you mention minor beneficiary do via appointment could you do it if Beneficiary over age 18?
A. we offer a deed of assignment to beneficiaries 18 and over and a deed of appointment for those younger. Can’t think of a reason why you couldn’t use a deed of appointment for an 18 or over. Your usual contact can help you with the paperwork.
Q If monies are in trust under a GIA and they are not happy with performance and now looking to move to bond what are the implications tax wise if trust made no capital gains or when made substantial CGT?
A. If no capital gains then no tax on encashment and if there are capital gains above the trustees Annual Exempt amount then 20% tax due. Is a bond suitable? If you are unsure then you can ask your usual contact to pass the deed to the technical team for a review.
General Matters
Q. An IFA recently advised a client to surrender an offshore bond so that this could be used to improve the clients pension provision. The client took a tax hit for c£5,000 on the gain and is a BRT. The proceeds with then be used to top up her pension over a few years. Good idea? Proceeds were £150,000.
A. Les discussed this on the post webinar Q&A. Conclusion was to run the numbers in cases such as these albeit £5,000 hit for £150,000 isn’t bad. The tax relief modeller may be of assistance.
Q. Does the tax wrapper comparison tool just compare onshore vs offshore bond or does it include OEIC too?
A. OEICs too
Q. If £100,000 is invested by a basic rate taxpayer, could you provide a table on dividends, income, gain & total in respect of Unwrapped vs UK Bond wrapped?
A. Run the numbers on the Tax Wrapper Comparison Tool
Tech Matters
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