Onshore Investment Bond
A UK life insurance wrapper used for tax deferral. Gains are taxed only on a chargeable event, with 5% annual withdrawals treated as return of capital and top-slicing relief available.
How It Works
You invest a lump sum into a life insurance bond. The fund grows with 20% internal tax. You can withdraw up to 5% of the original investment per year without immediate tax. On full surrender, the gain is taxed as income with a 20% credit and top-slicing relief.
Tax Treatment
The fund pays 20% corporation tax internally. On a chargeable event, gain is taxed as income with a 20% credit. Top-slicing relief can reduce the effective rate. 5% annual withdrawals are tax-deferred.
Tax Advantages
- Tax deferral — no annual income tax or CGT while invested
- 5% annual tax-deferred withdrawals for income planning
- Top-slicing relief can significantly reduce effective tax rate
- 20% tax credit for internal tax already paid
Who Is This Suitable For?
Higher rate taxpayers wanting to defer tax until a year when they are basic rate (e.g., retirement). Also useful for trust planning.
Frequently Asked Questions
When should I cash in?▾
Ideally when your income is lower (e.g., retirement). Top-slicing helps, but cashing in as a basic rate taxpayer means the 20% credit covers most of the tax.
How does the 5% rule work?▾
Withdraw up to 5% of original investment per year tax-deferred. Unused allowance rolls forward — after 20 years you can withdraw 100% of original investment tax-deferred.
Can I assign the bond?▾
Yes. Assignment is generally not a chargeable event, useful for transferring to a lower-rate taxpayer spouse before encashment.