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Any tax liability on withdrawals is calculated on the amount withdrawn in excess of the accumulated 5% allowances.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.