Are we entering an investment bond renaissance?

Following the Capital Gains Tax (CGT) changes announced in last year’s November Budget, many investors are likely considering investment bonds a more attractive option. The Chancellor’s decision to reduce the CGT allowance to £6,000 this year and to £3,000 in April 2024 means investment bonds are more attractive to mass-affluent investors who previously held money in OEICs and unit trusts.

Investment bonds offer several benefits:

• Onshore bonds are not liable to CGT. Onshore bonds are treated as having already paid 20% tax on any gains when calculating a chargeable gain. In reality, the tax deducted is likely to be less than this.

• They can be ideal for Inheritance Tax (IHT) planning and are exempt from IHT after seven years if held in a trust.

• Investors can withdraw up to 5% of their initial investment annually without triggering a chargeable event or any immediate tax liability.

• Top slicing relief is available to reduce tax liability, which can eliminate or significantly reduce any tax liability when a chargeable event is incurred – helpful if investors are in the accumulation phase and are preparing for retirement (for example, they may be a higher rate taxpayer while owning the bond, but a basic rate taxpayer when encashing).

• There are options to assign a bond (for example, between husband and wife). For tax purposes, the assignment will generally be treated as if the new owner had always owned it. If one is a basic rate taxpayer, they could have no tax to pay on encashment.

Have you exhausted your other tax allowances?

Changes to CGT and the tax-free dividend allowances are also likely to appeal to investors looking to reduce IHT liabilities and those who have used their Individual Savings Account (ISA) allowances or received a large windfall payment.

Therefore, it is important to be aware of all your allowances and whether these have been used fully. A financial adviser can help make this clear and easy to understand so that you benefit the most from the options available, including the potential advantages of a bond if it suits your circumstances.