Last week IFAC wrote an article on the budget, and how the army of tax increases coming over the hill will create opportunities to advise. Tax advice is due to boom! IFAC explained how pensions and Isas, family investment companies and creative planning will all play a role. One eagle eyed IFA pointed out that Insurance Bonds will most surely come back into fashion.
The declining numbers of bonds sold since the 1990’s when the life offices were on the crest of a wave has been extraordinary – few IFAs sell them now, numbed by the complexity and lured by the new platform culture which displays all costs with such beautiful transparency.
Invest in the Life Office and you lose that transparency but gain in other ways. The investment insurance bond is taxed under insurance tax rules, largely escaping or at worst deferring the 40% and 45% tax bands if handled correctly. Bonds do not produce an income as it arises - hence the tax deferral. When cashed in the gain is added to current year income. So you are talking about a tax deferral scheme. Excellent for clients looking at moving into a care home or sheltered accommodation where the council may be contributing, or means testing rights (of which more here)
Excellent too for those with fluctuating incomes – ie pre-retirement. And as the older IFAs will know, there is one critical advantages of bonds over GIA type accounts – you can assign a bond and avoid the gain on transfer. An assignment not for value (i.e. not for 'money or money's worth') does not trigger a chargeable event. Therefore, gifting a bond does not create a chargeable event. Perfect for the IHT planner.
Using multiple lives assured for a life assurance contract can also avoid a chargeable event on death of the policyholder. Put the bond offshore and add multiple family members onto the lives assured thus ensuring ownership passes seamlessly down the generations. The death of just one life when two are lives assured, is not a chargeable event.
In addition it is notable that offshore bonds also have key advantages over onshore bonds as explained here. The remittance rules for UK resident non-UK domiciled individuals do not apply to offshore bonds. Therefore, provided the capital invested into the bond is "clean" (no unremitted interest or gains) then no income tax is payable until a chargeable event occurs and of course there is no CGT payable at any stage. In an increasingly international world, foreign trustees, and UK resident trustees moving abroad will become more important, giving some juicy opportunities to cash in while temporarily not liable to UK tax, and take proceeds tax free.
Here is a summary of the Bonds position
It is important to understand eligibility for deficiency relief and time apportionment relief
Chapter 9 comprises Sections 461 to 546 and from outset, S461(1) makes it clear that gains are charged to income tax.
60% TAX BAND
Those earning between £100,000 and £125,140 are the worst hit. Income in this band is effectively taxed at 60% because you lose £1 of tax-free personal allowance for every £2 you earn over £100,000. And then you’ve got the 40% tax on top. Keep your income just below £100,000 by using pension contributions and salary sacrifice.