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Investment Bonds and Trusts

Investment bonds can be particularly appropriate investment vehicles when used in conjunction with trusts. This is because investment bonds are not deemed to generate income, even if the underlying funds which the bond is invested in are income generating.

Other reasons investment bonds are favoured for Trustee Investments include:

  • No income tax liability unless a “chargeable event” is triggered.
  • Tax reporting simplicity, since the trustees do not have to produce yearly income tax returns.
  • Some trusts rely on regular payments to be made to the settlor (or original investor). This can often be accommodated with the facility for an investment bond to make 5% cumulative withdrawals without triggering an immediate liability to income tax.
  • Often Trustee Investments require an element of caution to realise the intended objective without risking the capital. The ability to add guarantees to investment bonds is often an essential feature which other types of investment cannot offer.
  • Bonds are free from Capital Gains Tax (CGT) so trustees are free to switch between funds held within the bond without creating a CGT charge.
  • Free from Inheritance Tax exit charges on withdrawals, as long as the value of the investment bond remains below the Nil Rate Band.
  • A beneficiary reaching the age of 21 does not create an “occasion of charge”.
  • Since investment bonds are deemed to be “non income producing assets” so there is no requirement to make distributions to the beneficiaries once they reach age 18.
  • If the beneficiary is a non or basic rate tax payer, the ability to apply “top slicing relief” to the proceeds of the investment should make it possible to avoid having to pay higher or additional rate tax on the proceeds.
  • Trustees can assign investment bonds to beneficiaries when they become entitled, avoiding a charge to tax. This allows the beneficiaries to surrender the bond with reference to their own tax position.

Examples of the types of trust which require payments to be made on a regular basis include Discounted Gift Trusts and Loan Trusts– both of these trusts are cornerstones of Inheritance Tax mitigation. With these types of trust arrangement, the investment bond’s ability to pay 5% per annum dovetails with the requirement of the trusts to facilitate a regular income.

Careful use of trusts can ensure that the proceeds of an investment bond are not subject to Inheritance Tax. To find out more, see our section “Trusts for inheritance tax planning”. These trusts can be used to avoid the proceeds from falling into the investor’s Estate. They can also avoid probate delays which can be lengthy, allowing the beneficiaries to receive their inheritance quickly.

Whilst investment bonds carry an element of life cover, this tends to be either 101% or 100.1% of the value of bond on maturity. It should be noted that this is very different to having life cover as a percentage of the original investment. For example, if an investment bond of £100,000 had halved in value, the life cover component would pay £50,500 if the life cover was 101% of the value of the bond, or £50,050 if it was 100.1%. Consequently, it can be prudent to add additional life cover, also written in trust, to cover any future shortfalls. It should also be noted that some investment bond providers offer a “return of premium guarantee”, designed to protect the proceeds of the investment bond so it never falls below the value of the original investment.

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