Did you know that the way bonds are structured and the tax advantages they provide can help you pass on your wealth? Investment bonds offer several benefits that investors shouldn’t miss out on. Plus, recently, they have become even more beneficial with changes in tax regulations that reduced the Capital Gains Tax (CGT) Allowance from £12,000 to £6,000 this year and down to £3,000 from April 2024. To learn more about how investment bonds can help you during financial planning, read on.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Despite having numerous advantages, research from LV indicates that only a minority of investors — 10% of UK adults — truly understand investment bonds. If you don’t fully comprehend exactly how to take advantage of investment bonds, you won’t be able to fully capitalise on all the benefits they provide.
The impact of these tax changes
The changes to CGT allowance will appeal to investors hoping to do all they can to minimise Inheritance Tax (IHT) liabilities when passing on wealth. The current IHT nil-rate threshold of £325,000 has been the same since April 2009, with no signs of changing in the future. Because of this, people are seeking out trusts to keep their money outside of their estates.
If you have already maximised your ISA allowances and other tax-efficient wrappers, or if you’ve received a substantial windfall, consider using investment bonds. Investment bonds fall into two categories: onshore and offshore. They are treated differently when it comes to tax treatment, so for more information on both kinds, and for help deciding which to use, reach out to a financial adviser.
Not subject to Capital Gains Tax
One of the major benefits of investment bonds is that they are not subject to CGT. Often with onshore bonds, it is assumed that a 20% tax has already been paid, when the real amount paid is likely much lower. Plus, investment bonds can also be advantageous for IHT planning. If held in a trust, after seven years they’re exempt from IHT. Despite this benefit, only a quarter of bondholders have written their bonds in trust and therefore considered part of their estate as far as IHT is concerned.
Additional benefits to investment bonds
An additional advantage to investment bonds is that investors can withdraw up to 5% of their initial investment annually without triggering a ‘chargeable event’ or incurring tax liability.
Investment bonds also offer benefits if you have a spouse since you can assign them between spouses. In terms of tax rules, the assignment is usually viewed as if the new owner has always owned the bond. This is especially beneficial if one spouse is a basic rate taxpayer, so you won’t have to worry about paying tax when cashing out.
Incorporating investment bonds into your investment plan
Investment bonds not only offer several benefits for investors, they also provide the potential for medium to long-term growth on your money. We can help you ensure your investment plan is also tax-efficient. If you’d like to learn more about investment bonds and how to incorporate them into your investment plan, get in contact with Dental & Medical Financial Services today.