With Profit Bond
What is it?
A With Profits Bond is an
investment of a capital sum into a vehicle that
provides an investor with the potential for capital
growth and an income if required. It is intended to
be medium to long term investment.
Who are they for?
A Profits Bond is aimed at
investors who wish to invest in a tax efficient way
to achieve medium to long term growth at low to
medium risk.
How does it work?
A capital amount is invested into
a With Profits fund. Profits are added to the
investment by adding bonuses to the investment.
Bonuses are declared out of the investment earnings
and profits. There are two types of bonus – an
annual bonus and a terminal bonus, which may be
added when you cash in or make withdrawals from the
investment. Adding bonuses in this way helps smooth
out the fluctuations in the value of the underlying
assets. The level of bonuses is not guaranteed.
The With Profits Fund
The underlying investments of a
With Profits fund include UK and overseas equities,
fixed interest securities, corporate bonds, gilts,
property and cash. The amount of equity content
ranges from 30% up to 75% of the fund depending on
the product provider and this provides for the main
capital growth of the fund.
Tax situation
A With Profits Bond is not a
tax-free investment as the underlying investments in
the With Profits Fund suffer Income and Corporation
tax at basic rate. These taxes are paid by the fund
and therefore there us 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is calculated on the amount withdrawn in excess of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 the
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 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.
The death of a single bondholder
or the last survivor of a joint bond will be classed
by the Inland Revenue as a chargeable event. This
could lead to a tax charge for higher rate taxpayers
and for a basic rate taxpayer becoming a higher rate
tax payer due to ‘top slicing’ 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. |
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