Barclays Wealth

Investment bonds

Sometimes referred to as insurance bonds, investment bonds are single-premium (i.e. lump sum rather than regular) savings contracts issued by life insurance companies. They offer you a simple and, if used correctly, potentially tax-efficient investment that can help you maximise your income.

Onshore investment bonds

These invest in UK life funds.

Their key features include:

• Within the bond, fund income not already taxed in the UK, such as interest or property income, is taxed at 20% (2011/12)
• Dividends from UK companies received within the bond are free of further tax as they are paid from taxed profits
• All gains realised within the bond (after indexation relief) are subject to corporation tax
• No capital gains tax is paid, but this means capital gains allowances cannot be utilised
• They can be placed into trusts such as discretionary gift trusts, which can help the investments become more tax-efficient.

Offshore investment bonds

These involve a lump sum investment in a policy linked to units in a fund, which can be made up of highly liquid and tradable assets such as cash, collective investments, certain structured deposits and alternatives. Variable annuities are one example of an offshore bond.

Unlike onshore bonds, offshore bonds accumulate gross (subject only to any withheld taxes on certain distributions that are not reclaimed by a life company) which allows them to grow free of income tax and capital gains tax. The accumulated growth though will be taxed at the income tax rate of the bondholder at redemption.

If you're a UK resident, offshore bonds can be a good option if:

• You plan to live or retire abroad
  Some overseas countries may have more favourable tax breaks than the UK.
• You'll be a non-taxpayer at the time of a chargeable event
  A chargeable event occurs when your withdrawals are subject to tax - for example, if you withdraw more than 5% in one year or cash in your bond. If you undertake these actions as a non-taxpayer, you will not be subject to these charges.
• You plan to invest over the long term
  This gives your bond more time to offset the initial and ongoing charges.
• You pay tax and wish to withdraw more than 5% in one year
  Withdrawals of this size can qualify for top-slicing relief which may reduce the amount of tax you have to pay. This only applies where the withdrawal takes you into a new tax band. The position is the same as for onshore bonds.
• You're looking for investments that are exempt from inheritance tax
  Like onshore bonds, offshore bonds are exempt if they're gifted into a trust and held for seven years.

Find out more about investment bonds

To learn more about how Barclays Wealth could help you, please contact us and we'll be in touch as soon as possible.

Tax treatment will depend on an individual's personal circumstances and may change in the future. Barclays Wealth does not provide tax advice. If in doubt we recommend you obtain your own independent tax and legal advice tailored to your individual circumstances.

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