5 min read 28 May 21
Investment funds and insurance bonds, are both mainstays of financial planning. But their different features and tax treatment means their suitability for clients can vary. Below we detail the tax treatment of both and, below, outline circumstances when each may be appropriate.
(OEICs, unit trusts)
(Onshore and Offshore)
|Gives exposure to a pooled, professionally-managed investment portfolio||Gives exposure to a pooled, professionally-managed investment portfolio|
|Wide range of strategies available||Wide range of strategies available|
|No life insurance element||Includes a life insurance element|
|Can be held in an ISA or SIPP||Cannot be held in an ISA or SIPP – but offshore versions are available|
|Can be held indefinitely and redeemed at any time||May have a minimum term|
Applies to both accumulation and income shares:
Onshore bonds: Same as investment funds (left) plus 20% corporation tax also payable on realised capital gains
Offshore bonds: Usually registered in a tax-favoured jurisdiction, enabling ‘gross roll-up’ of gains and income3
Gains on bonds only subject to tax on the following ‘chargeable events
Onshore bonds: Gains treated as the highest slice of income and the tax rate will depends on the marginal rate they push the holder into: basic (0%4), higher (20%) and additional rate (25%)
Offshore bonds: Gains treated as savings income and can be set against the Personal Allowance, Savings Starting Rate and/or Personal Savings Allowance where available. Then taxed at basic (20%), higher (40%) or additional rate (45%)
Profits on insurance bonds are not subject to capital gains tax – only income tax, as above.
1 - To avoid double taxation, if a fund is interest-distributing, gross interest distributions are relievable as an expense against the fund’s income 2 - To qualify, 60% of more of the fund’s market value must be invested in interest-yielding assets – e.g fixed-interest bonds and cash deposits 3 - Withholding tax may be deducted at source and cannot be reclaimed 4 - Reflects that corporation tax is paid internally
The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.