Tax efficient investing during an economic downturn – Investment Bonds

Tax efficient investing during an economic downturn – Investment Bonds

Investment bonds have been capturing the attention of financial commentators in recent months, most notably in relation to the changes in Capital Gains Tax (CGT) went ahead in April this year.  The main focus of this coverage is whether they still have a place in an investor’s portfolio, especially when compared to the relevant alternative of unit trusts/OEICs.

The situation is as follows; you are probably aware that CGT was reduced to a flat rate of 18% from April this year.  The reason this is important for holders of Investment Bonds is because they are not subject to CGT.  Instead, the life company pays tax on the value of the underlying fund of up to 20% on an ongoing basis, which can impact on the returns of the Bond.  In addition, a higher rate tax payer is liable for a further 20% income tax charge on encashment.

The reason unit trusts and OEICs (Open Ended Investment Company) can now be seen as a potentially more tax efficient alternative is that they are not subject to income tax on encashment. A unit trust or OEIC investor is now only liable to pay an 18% CGT bill at encashment, and they can also make use of the annual capital gains tax-free allowance of £9,600 (2008/09). Previously a unit trust or OEIC investor would be liable to pay CGT at their highest marginal income tax rate, so up to 40% for higher rate tax payers and up to 20% for basic rate tax payers.  Investment Bonds were therefore in a similar tax position and often formed a very useful part of investor’s portfolio.

The opinion of many financial commentators is that Investment Bonds now serve a lesser purpose in the marketplace and, as a result of the now less favourable tax treatment and often inferior performance* are outshone by unit trusts/OEICs.

If you hold an Investment Bond it may be worthwhile re-assessing whether this remains a relevant product for you. This will be dependent upon your individual tax position, investment objectives, and the type of Investment Bond you are holding.  

At Chartwell Direct, we believe it is important for you to re-assess your investments in this fashion on a periodic basis. We will be providing information bulletins and ‘risk based’ assessment services for all clients who invest through us or want to learn more about themselves as ‘investors’.  

In this regard if you are a holder of an Investment Bond either through us or with another broker, we would be delighted to provide you with a copy of the ‘Chartwell Investment Bond Bulletin’ that has been written by our research team.  To receive a copy please call Peter McLean on 01225 823947, or by email at peter.mclean@chartwell.co.uk.



*Source; Lipper UK all company sector.  The 10 largest UK unit trusts returned 25.4% more than the 10 largest UK unit-linked investment bonds over the past 5 years