View more on these topics

Capital investment bonds

These will be particularly useful because:-

  • They are non-income producing – there is no need to make an entry in the annual tax return until a chargeable event gain is made, say on full encashment or a withdrawal of more than the cumulative unused 5% allowances;
  • No personal liability to basic rate tax arises on income and growth (although the income and gains generated by the investments underlying UK bonds are taxable in the hands of the insurance company);
  • Tax efficient “income” can be taken in the form of partial encashments;
  • The basic rules that apply to capital investment bonds with UK life companies mean that, when an investor encashes his bond, the gain will be added to his other taxable income and, if appropriate, (after top-slicing relief), he will suffer higher rate income tax. The gain under a UK bond is treated as having suffered basic rate tax and so the maximum rate of income tax that will arise on such a gain if an encashment is made in 2003/2004 will be 18%, i.e. 40% higher rate tax less 22% basic rate tax. Two particular points need to be noted here:-
      1. the gain is not grossed up to reflect the basic rate tax paid within the insurance company&#39s funds – it is the net gain that is chargeable; and

      2. although the gain is treated as if basic rate tax has been paid, it is likely that the insurance company has in fact paid tax at a rate less than the basic rate. For example, insurance company policyholder funds would currently only suffer 20% corporation tax on savings income and dividends received with a 10% tax credit would bear no further tax. Moreover, although a life assurance company is liable to 22% corporation tax on capital gains, in practice this liability will be at a lower effective rate reflecting loss relief and the ability to only realise assets at the best &#34tax time&#34. As indexation relief is still available to companies, this will apply to the insurance company&#39s investments meaning that indirectly the policyholder benefits from this relief.

The upshot of all this is that although because of the basic rate credit a policyholder&#39s gain will be treated as having suffered tax at 22%, it may in fact have only suffered tax at (say) 20%. This, combined with the fact that the chargeable event gain will not be grossed up for income tax purposes, will mean that the effective rate of tax on the gain may be as low as 34.4% for 2003/2004 notwithstanding that the policyholder is a 40% taxpayer. For this reason UK capital investment bonds continue to look very attractive for the higher rate taxpayer seeking capital growth in a tax-sheltered environment.

Of course, complete tax sheltering is available via an offshore bond but, on encashment, all gains will then be taxed as the taxpayer&#39s top slice of income and be subject to tax at his marginal rate of income tax. Whether an offshore or UK bond is more appropriate in any particular case will depend on many factors including likely investment terms, returns, withholding taxes and charges.

It is also important to remember that neither taper relief nor the annual capital gains tax exemption can be used in respect of capital investment bond gains although, as mentioned above, capital gains made by a UK life fund will currently qualify for indexation relief which will have a downward impact on the effective rate of tax that the fund suffers.


Treasury pledges an open market for CTFs

After two years and three rounds of consultation, the Treasury has finally announced the launch of its Child Trust Fund savings initiative, although final details will not be published until the summer. The scheme, which is expected to be available from 2005, will see initial cash endowments of £250 for every child born since September […]

Gains from policies held on a charitable trust

The Chancellor proposes that, with effect from 9 April 2003, trustees of charitable will only have to pay tax at the basic rate which means that for most UK policies they will currently have no tax to pay. The background to this change is the chargeable event rules that apply to chargeable events on policies […]

Long-term loan review &#39is on the wrong track&#39

Lenders and IFAs have denounced the review of the UK fixed rate mortgage market announced by Chancellor Gordon Brown in the Budget, branding it pointless and irrelevant to the majority of borrowers. The Chancellor announced in the Budget he was commissioning a review investigating why there is such a low take up of long term […]

Jordan leaving Skandia for Widows&#39 marketing role

Skandia head of product marketing Peter Jordan is leaving the company after 10 years to become marketing director at Scottish Widows.Jordan will report to marketing and distribution managing director Nathan Moss and will concentrate on product marketing to the IFA sector as well as Widows&#39 relationship with banks.Moss took over responsibility for marketing at Widows […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm