This simplicity flows through to the customer too as, if there is no investment income and gains to pay tax on, there may be no need for them to complete a self-assessment tax return.
Onshore versus offshore bonds
So far we have concentrated on onshore insurance bonds but it would be remiss not to mention their offshore cousins as any increase in the use of onshore bonds should also see an increase in the use of offshore bonds.
Offshore bonds offer all of the same tax advantages as the onshore bond, with the exception of the basic rate tax credit. The key difference between the two offerings from a tax perspective is that with an offshore bond, the money grows in the bond tax free.
This means that there is no basic rate tax credit so where a slice sits in the basic rate band the full gain would be taxed at 20 per cent.
For some, using an offshore bond can be as tax efficient as an Isa without the £20,000 investment limit. As bond gains are classed as savings income, it means that in certain circumstances a gain of up to £18,570 within an offshore bond could be completely tax free on encashment.
This is the case where the personal allowance of £12,570, the starting rate for savings of £5,000 and the personal savings allowance of £1,000 are all available to the individual.
A common planning strategy with offshore bonds, where it is known that the person liable for any gains is going to have some or all of these allowances available, is to assign some or all of the bond to someone else to encash, perhaps a child for when they go to university.
This can result in the investment being completely tax-free. Or it may be possible to reduce the bond holders income in the year of encashment, perhaps by turning off drawdown income for a year, to ensure allowance availability.
There are many factors to consider when deciding on whether to choose an onshore or offshore bond. Broadly speaking, if there is going to be a tax liability, then the overall tax onshore of 20 per cent, 36 per cent or 40 per cent is lower than the 20 per cent, 40 per cent and 45 per cent offshore.
Is the bond trend set to continue?
In recent years we have seen the shifting tax landscape reduce the CGT disadvantage of holding investments inside a bond while simultaneously enhancing the income tax advantage of doing so, which has made insurance bonds a more attractive tool for delivering the highest net return, particularly for higher and additional rate tax payers.
The question now is what impact any measures announced in the Budget on October 30 will have on the attractiveness of insurance bonds and whether the post-Budget tax landscape shifts the dial back towards GIA or further towards bonds.
