Investment bond


What is an investment bond?

An investment bond is a single-premium life insurance policy that can be used to hold investments in a tax-efficient manner. As with any investment, the value of the bond may go up or down depending on how well your investments perform.

Investment bonds come in onshore and offshore versions. Onshore and offshore bonds may sound like a secret agent’s work and leisure plans. In fact, they are nothing quite so glamorous. Rather, they are another vital instrument in an investor’s toolkit.

But how do they work and are they suitable for you? Here’s your essential guide with everything you need to know about bonds.

How do investment bonds work?

They are single premium policies that pay out some of the life insurance on death and where the premium is invested to achieve capital growth until the bond holder withdraws money from the policy.

If you have used up all your ISA and pension allowance limits, you might want to invest in bonds with either offshore or onshore bond wrappers. Wrappers refer to the tax advantages applied to different financial arrangements.

Investment bonds come in two types, onshore and offshore investment bonds, depending on whether the companies that issue them are in the UK or not. This in turn determines the kind of tax regime they come under.

Onshore bonds

Onshore bonds are life insurance policies issued by UK life insurance companies. They provide negligible life cover; instead, customers invest a fixed amount and pay further amounts into a range of funds. They are taxed according to income tax rather than capital gains tax. Policyholders can withdraw up to 5% of the amount invested each year without incurring immediate tax liability.

Offshore bonds

Offshore bonds, sometimes known as international bonds, are issued by companies outside the UK. They are not subject to capital gains tax and can hold a range of assets. By being issued offshore they blend an investment portfolio with the tax advantages of a life insurance policy.

Gains can grow over time without any immediate tax charge, and you can withdraw up to 5% of the total amount paid into the bond each year. As this is considered a “return of capital” instead of income, it is not liable for tax, but tax is paid when the capital is eventually accessed.

Onshore v offshore, which is better?

You pay tax on any gains and investment income from the underlying investments of an onshore bond but with an offshore bond tax is not incurred on the underlying investments.

What do you need for an investment bond?

You may need a minimum investment amount of between £5000 and £10000 to park in an investment bond. Some investment bonds may also have minimum investment terms. There are also charges which depend on the type of investment bond you get.

What are the advantages of investment bonds and why are they important for financial planning?

Tax: bonds are a tax efficient means of saving and investing your money. Underlying fund selection can be changed without incurring capital gains tax as the change happens within the bond.

Flexible: You can move to another bond provider and create tailored portfolios.

Liquidity: you can withdraw funds of up to 5% a year for 20 years providing you with an income stream.

Mitigating inheritance tax: Bonds are considered an “assignable asset”. So, you can reduce inheritance tax bills by assigning offshore bonds into trusts.

Gifting: As they are assignable assets, you can transfer them as a gift to another person without any capital gains liability, or you can gift them to a trust.

Choosing an investment bond

You might consider an investment bond if you:

  • Have at least £5,000 that you wish to invest.
  • Have used up your ISA allowance for the year.
  • Can afford to invest your savings for a set amount of time.
  • Are comfortable with the potential risks and fluctuating value of your investment.

Choosing whether and which bond to invest in depends on your individual investment needs. They can provide a useful, tax-efficient income stream but they are also a more sophisticated investment choice and come with fees so should only be accessed using expert advice.