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

The bond suffers corporation tax inside the life fund. The actual rate paid within the fund will vary but the bondholder will be deemed to have paid tax in the fund at a rate equal to 20% even where the rate is actually lower.

Capital gains occurring within the life fund are taxed at 20% but will benefit from indexation relief. This was removed for individuals in 1998 but life funds still benefit from this relief and will continue to do so.

UK dividend income received suffers no further tax after the 10% tax credit, and all other income received suffers 20% though savings income will have had tax deducted at source.

On encashment a higher rate taxpayer will pay an additional 20% on the net gain, which means the maximum effective rate will be 36% (20%/20%). From 2010/2011, an additional rate taxpayer* will pay an additional 30% on the net gain on encashment, which means the maximum effective rate will be 44% (20%/30%).

For basic rate taxpayers there is no further liability but there is no opportunity for starting rate or non-taxpayers to reclaim any tax paid or use any unused personal allowance.

• 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.
• Realised gains may benefit from top-slice relief which can reduce or remove any higher or additional rate liability.
• Top-ups will benefit from top-slicing from inception (individuals only).
• The bond can be assigned by way of gift without giving rise to a tax charge although there might be inheritance tax (IHT) considerations.
• 5% tax deferred allowance of the original investment can be taken each year for 20 years without creating an immediate tax liability.
• For the purposes of age allowance, withdrawals within the 5% tax deferred allowance are not treated as income.
• Can be gifted into trust and assigned out of trust without giving rise to an income tax or CGT charge.
• Multiple lives assured can be used at outset to avoid a chargeable event on death of the applicant(s).
• Single premium investment bonds are not normally included where means testing is applied by a local authority for residential care.
• Extra life cover available.

• No tax reclaim for the tax paid by the life fund for starting rate taxpayers or non-taxpayers.
• Base cost of investment is not revalued on death for income tax purposes (chargeable event gains are assessable against original investment).
• Death of last of the lives assured will create a chargeable event (even if bondholders are still alive).
• As withdrawals from a bond are assessable to income tax it‘s not possible to use a personal or trustee CGT allowance to reduce gains.
• Chargeable event gains reduce any available age allowance based on the total gain, not sliced gain.
• May not be a suitable investment for trustees where an ‘income’ on interest exists inside a trust.
• Investment losses cannot be offset elsewhere.
• On death, income tax and IHT may be due.