Chargeable events for an investment bond are triggered when one of the following events occur:
- Full and final encashment of the investment bond.
- Withdrawals in excess of the 5% per annum cumulative allowance.
- Withdrawals after the 5% per annum allowance has been used for 20 years. If an investment bond has been paying a 5% per annum income for 20 years, HMRC deem this to be a return of the investor’s original capital and any additional withdrawals would be considered chargeable events each time they are made. In this instance, all of the 5% withdrawal after the 20 year term is added to the income of the bondholder and taxed at their highest marginal rate of income tax. Had the bondholder been receiving income of 4% per annum, they would be allowed to utilise all carried forward allowance, in this case meaning they could continue their withdrawals of 4% per annum for 25 years.
- Assignment, or part assignment, of the bond for money or money’s worth. This would not include assignment between cohabiting spouses or civil partners or assignment by way of security for a loan.
- Death of the life assured, or in the case of a jointly held investment bond, on second death of the last life assured. Please note some investment bond providers allow you to add multiple lives assured – in one case up to a maximum of nine.
- Maturity of the bond. This is only relevant to a type of investment bond called a Capital Redemption Bond which has a fixed term from outset.
- Policy loans if the investment bond started after 26th March 1974.
- A fundamental change to the basis of the bond. For example, if one or more of the lives assured was changed.
Taxation of a chargeable gain
In the event of a chargeable gain on an onshore investment bond, the gain is added to the investor’s income in the tax year when the chargeable event occurred and only if some or all of this gain falls into the higher rate tax bracket is a tax charge triggered. If, after adding the gain, the investor remains a basic rate taxpayer, there is no tax to pay even though a chargeable event has occurred. Once a chargeable gain has been calculated, it can be reduced by applying “top slicing”. For more on this, refer to our section on top slicing relief.
This differs for the calculation of a chargeable gain for an offshore investment bond, since the underlying assets are not deemed to have been subject to basic rate tax. Hence no credit is given for tax already paid since the funds held within an offshore investment bond have been rolling up with no tax being paid other than a tax on some of the dividend income, which is called “withholding tax”.