Unit-Linked Investment Bond
What is it?
A Unit Linked bond is a single premium investment
policy that provides an investor with the potential
for capital growth and income if required. It
should be considered as a medium to long term
investment. They offer the investor an opportunity
to invest in pooled or collective funds that provide
access to a wide range of investments.
Who is it for?
A Unit Linked bond is suitable for an investor
who wishes to achieve a spread of investment that is
professionally managed. The tax regime that applies
to this type of investment makes it particularly
attractive to current high rate taxpayers who are
likely to become basic rate taxpayers at the time
they wish to withdraw the investment from the bond.
How do they work?
The capital amount is invested in
a fund that is sub-divided into units each
representing an equal share of the net asset value
of the fund. As the underlying investments of the
fund fluctuate in value so the value of the units
increase or decrease. Each investment made is
allocated to units at the unit ‘offer’ price
prevailing on the investment date. When units are
encashed to pay for policy costs or to provide
benefits, they are cashed at the ‘bid’ price.
Generally the difference between the offer and the
bid price is 5 or 6%. Some funds have no bid offer
spread.
Unit Linked Funds
Providers offer a full range of
funds for investment.
Tax situation
Bonds offer certain income tax
advantages, in that they allow you to take control
over the timing of when and how much tax is paid.
A Unit Linked Bond is not a
tax-free investment as the underlying investments in
the Unit Linked Fund suffer Income and Corporation
tax at the basic rate. These taxes are paid by the
fund and, therefore, there is no further tax
liability to Income Tax or Capital Gains Tax for
basic rate taxpayers.
For higher rate taxpayers (or
those on the threshold) as long as the total amount
of income and/or withdrawals made each year for the
first 20 years is restricted to 5% of the original
investment, a further tax liability can be avoided.
Any unused 5% ‘allowance’ can be carried forward to
future years. A withdrawal over the 5% p.a.
allowance or on full encashment is called a
chargeable event.
Any tax liability on withdrawals
is calculated on the amount withdrawn in excess of
the accumulated 5% allowances. This amount is added
to the investor’s taxable income.
‘Top slicing’ may help to reduce
this tax liability for basic rate taxpayers. This
is whereby the excess is divided by the number of
complete years that the bond has been held since
that last chargeable event. The profit slice is
then added to the investor’s taxable income. If the
profit slice falls into the higher rate tax bracket
it is taxable at the higher rate minus the basic
rate (i.e. currently 20%). The total tax due is
then calculated by multiplying this amount of tax by
the number of years since the last chargeable event.
Full encashment of the bond can
be deferred until the investor’s income is lower to
help further avoid a tax liability. An example of
this would be to wait until retirement perhaps.
Whatever your financial advice requirements are,
you can be assured that Ashton Hoyle are well
positioned to provide an innovative answer and we
look forward to speaking to you on any financial
matter. Contact us now
to see how we can help. |
Our
Services