In focus: investment bonds and collective investments

24 January 2020

Julia Peake, Sanlam UK, discusses the key tax considerations and benefits of investment bonds (onshore and offshore) versus collective investments, given some recent changes that may affect your client recommendations.
The age-old debate of offshore bond versus onshore bond versus collective investments continues to rumble on and this has been particularly prevalent over the past few years with the introduction and then subsequent changes as to how dividends are received by individuals. Of course, every client is different, and the relative merits of each type of investment will have varied appeal, depending on a client’s individual circumstances but here are a few key considerations which might help formulate your recommendations:

Tax benefits and considerations for life assurance bonds (onshore and offshore)

Switching between funds does not give rise to any personal tax liability.

5% of the amount invested can be withdrawn, tax deferred. The 5% allowance is cumulative and can roll over for use in future policy years.

These are non-income-producing assets, so it’s simple to administer and there are no reporting requirements to HMRC until a chargeable event occurs.

Segmentation adds flexibility for assigning part or all of the bond to another, and adds control over when any tax could be due, and who is liable to pay it.

Adding younger lives assured could potentially extend the policy term, preventing a chargeable event on the death of older policy owners.

The whole of the chargeable gain is applied to test against the personal allowance.

Deficiency relief is available to higher rate tax payers when they make a loss on full surrender and they have previously had chargeable gains on the same bond.

Time Apportionment Relief is available to an investor who suffers a chargeable event and was a non-UK resident for part of the policy term. Historically this only applied to offshore bonds but now applies to onshore bonds issued after 06/04/2013.

Top Slicing relief might apply reducing the rate of tax charged by applying a spreading mechanism. Factors that will need to be considered are the client’s marginal rate of tax, if the bond is onshore or offshore, the number of years the bond is held, whether this is a full surrender or a partial excess event, whether time apportionment is applicable and if there had been and previous chargeable events on the bond.

Onshore - Upon a chargeable event, if you remain a non/starting or basic-rate tax payer then no further tax is due.
Offshore- No/low tax paid on assets so the investor benefits from gross roll-up of any investment growth.

Onshore - FSCS 100% with no upper limit.
Offshore - compensation scheme of tax jurisdiction in which the bond is based.

Offshore only - Chargeable gains treated as savings income (£5,000 at 0%), which is useful for non and starting rate tax payers.


Tax benefits and considerations for collective investments

Capital Gains Tax allowance (£12,000 personal, up to £6,000 for trustees 2019/20) can be used to negate some or all of any gains made.

Investors can opt to only receive the natural distributions from the underlying assets, preventing erosion of the original capital invested.

Tax payable on any gains depends on the marginal income tax rate of the owner.

Any capital losses upon sale can be carried forward to offset any future capital gains after applying any allowances.

Capital Gains Tax does not apply on death, but the investment could be subject to Inheritance Tax.

The dividend allowance of £2,000 at 0% could impact clients with unwrapped portfolios, leading to potentially higher income tax bills.

Interest payments paid gross since 06/04/17, so non and starting rate taxpayers no longer need to reclaim the tax.

Collectives and shares favoured by trustees of IIP trusts where there is a need for “real” income for a life tenant.

Unconditional gifting to a spouse or civil partner is exempt for CGT (receiving spouse inherits transferring spouse’s base cost).            

Income or accumulation distributions are treated as ‘income payments’ and should be reported on tax returns for both individuals and trustees.

Dividend and interest payments are added on top of any other income for age-related allowances and tax credits.

Large gains can push investors from basic to higher-rate tax payers.



The likelihood is that there is no one wrapper that will fit a client’s needs, and every recommendation will need to be bespoke for each individual’s circumstances, taking their risk profile and investment goals into consideration. This is a complex subject, so if you would like more information on this subject, please speak to your Account Directors about the technical factsheets we have, which may assist you in understanding this subject in more detail.

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document are based on current tax law and HMRC practice as at January 2020 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should always be sought.

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