Apt Financial Management

Investment Bonds

Investment Bonds are provided by life insurance companies and allow you to invest in a variety of funds managed by professional investment managers. They are normally designed to produce long term capital growth, but can also be used to generate an income.

PAUL TOON - Independent Financial Advisor

Paul ToonA special rule allows annual withdrawals from bonds of up to 5 per cent for 20 years without any immediate tax liability, as this is classed as a return of capital by HMRC.

Technically, investment bonds are single premium life insurance policies. This means an element of life insurance (usually 1%) is added to the value of the value of your investment in the event of death during the period the bond is held.

As Investment Bonds are life insurance policies, it is the insurance company that must pay tax on the income and capital growth generated by the investments held in a bond. Investors do not pay Capital Gains Tax on any gains, nor do they pay basic rate Income Tax on any income.

Higher rate taxpayers may become liable to Income Tax at a rate equal to the difference between the basic rate and the higher rates (20 per cent) - but not until they either cash in their bonds or make partial withdrawals of over 5 per cent per annum of their original investment.

A special rule allows annual withdrawals from bonds of up to 5% for 20 years without any immediate tax liability, as this is classed as a return of capital by HMRC.

It is possible to carry these 5 per cent allowances forward, so if you make no withdrawals one year, you can withdraw 10 per cent of your investment the next, without triggering a tax charge.

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Many millions of pounds were invested in these Bonds during the 1990’s and early 2000’s - investing in ‘With Profit’ funds and the Insurance Companies own ‘in-house’ funds.

Some investment bonds have struggled to match the returns of cash deposits and therefore it is vitally important that these types of investment are reviewed regularly to ensure that they still meet investors' long term needs.

The value of investments and income from them may go down. You may not get back the original amount invested.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.


Apt Financial Management, 4 The Willows, Hulland Ward, Ashbourne, Derbyshire DE6 3EW
Phone: 01335 370 515