Single premium investment bonds are taxed under the chargeable event legislation, which means gains are assessed to income tax, rather than capital gains tax (CGT).

As the bond is invested with an offshore insurer it does not suffer any income tax or CGT within the fund except for any unreclaimable withholding tax which may have been applied.

Any gains, dividends, rent or interest are taxed at 0% within the fund.

For individuals any chargeable event gains will be chargeable to tax at their appropriate rate: 10%, 20%, 40% or 50%.* Trustees will pay tax at 50%.

Taxpayers can use their personal allowance and the 10% and 20% (and 40% band from 2010/2011*) tax bands when calculating overall tax liability. For trustees, the first £1,000 worth of chargeable event gains (assuming no other income) is taxed at 20%.

For highly personalised bonds it’s important to remember that for UK resident policyholders there is a deemed charge of 15% of the premium and the cumulative gains per annum.

• Bonds are non-income producing assets so there are no annual tax returns for individuals or trustees.
• Funds can be switched within the bond without giving rise to a CGT or income tax liability on the investor and with no tax reporting requirements.
• Switches in and out of funds are not subject to the CGT 30 day rule so will not give rise to a taxable event.
• Income received gross within the bond wrapper will only suffer income tax on future disposal.
• Tax liability is reduced proportionally for time spent as non-UK resident.
• The bond can be assigned by way of gift without giving rise to an income tax charge, although there might be inheritance tax (IHT) considerations.
• 5% tax deferred allowances on each premium paid can be taken each year for 20 years without incurring an immediate tax liability.
• For the purposes of age allowance, withdrawals within the 5% tax deferred allowance are not treated as income.
• Realised chargeable gains may benefit from slice relief which can reduce or remove any higher rate liability.
• Top-ups will benefit from top-slicing from inception (individuals only).
• Multiple lives assured on a whole of life contract can be used at outset to avoid a chargeable event on death of the policyholder, or where there is more than one policyholder, on the death of the last of them to die. Alternatively, a redemption contract where no lives assured are required can be used.
• Can be gifted into trust and assigned out of trust without giving rise to an income tax or CGT charge.
• Single premium investment bonds are not normally included where means testing is applied by a local authority for residential care.
• Wide investment parameters.
• Ability to appoint third-party custodians and discretionary managers.

• On encashment, chargeable event gains can suffer tax up to 50%*.
• As withdrawals from a bond are assessable to income tax, it’s not possible to use personal or trustee CGT allowance to reduce gains.
• Base cost of the investment is not revalued on death for income tax purposes (chargeable event gains are assessable against original investment and any subsequent additional premium paid).
• Death of last of the lives assured on whole of life contracts will create a chargeable event (even if bondholders are still alive).
• Chargeable event gains reduce any available age allowance based on the total gain, not sliced gain applicable where total income exceeds £22,900.
• May not be suitable where ‘income’ interest exists inside a trust.
• Investment losses cannot be offset elsewhere.
• On death of the last of the lives assured, income tax and IHT may be due.

For more information, read the document 'Offshore single premium investment bonds for individuals'.