Investment bonds can be attractive savings vehicles, allowing you to invest a lump sum for a fixed period of time and earn interest. However, it’s important to understand the potential tax implications before investing. This guide covers the basics of how investment bond taxation works.
What Triggers Investment Bond Taxes?
You generally don’t pay taxes on your investment bond unless certain “chargeable events” occur. These taxable events include:
- Full surrender (cashing out the entire bond value)
- Partial surrenders (withdrawing over 5% allowance)
- Reaching the bond’s maturity date
- Assigning/gifting the bond to someone else
- Death of the last bond owner
Who Pays the Tax?
The person who owns the investment bond at the time of the chargeable event is responsible for paying any applicable income taxes on the gains. Companies holding investment bonds are exempt from these taxes.
Calculating the Tax
The way taxes are calculated depends on whether you have an onshore or offshore investment bond.
Onshore Bonds:
Gains are subject to income tax
“Top-slicing” relief can reduce the tax rate by spreading gains across years held
You are taxed on the gain as the top portion of your income after dividends
Offshore Bonds:
Gains are also taxed as income
Top-slicing calculations differ slightly
Taxable rate is either 20%, 40% or 45% unless personal/savings allowances apply
No matter the type of bond, the taxable gain is calculated by looking at the total growth of the investment over the years you held it.
While investment bonds can be tax-efficient savings options, being aware of potential chargeable events and how to calculate taxes is crucial. Consulting a financial advisor can also ensure you understand and plan for any tax obligations.
