In a landscape where financial advice often directs customers towards wrappers like an Individual Savings Account (ISA) or a Self-Invested Personal Pension (SIPP), Bonds, whether onshore or offshore, are an underutilised financial planning tool.

Onshore Bonds can be seen as too complex a wrapper for the average customer, and therefore not a necessary part of the typical financial advice journey. However, they can offer tax planning advantages and with the amount of money invested in the UK at £2.25tn*, s Bonds could be an important part in ensuring the best outcome for your client.

*Platforum 2024

What is an Onshore Bond?

An Onshore Bond is an effective tax planning wrapper and enables advisers to help clients plan to the best possible outcomes, in the lead up to, and beyond retirement.

Clients will often reach their personal allowance threshold for ISAs and pensions and then feel like they have no place to turn.

This has been an increasing problem with reductions in Capital Gains Tax (CGT) allowance and dividend allowances, which put extra pressure on advisers to create more complex tax planning advice.

When the government brought in the changes to the allowances, they estimated that 570,000 individuals and trusts could be affected in the 2024 to 2025 tax year. And of that figure, 260,000 individuals and trusts will be paying Capital Gains Tax for the first time**.

This will naturally put increasing pressure on advisers, solicitors, and accountants to re-evaluate clients’ planning needs and investment strategies.

**HMRC CGT Policy Paper, November 2022

How are Onshore Bonds taxed?

Onshore Bonds have a different tax treatment to the rest of the product wrapper suite (including ISAs, SIPPs, direct investment into an Open-Ended Investment Company (OEIC) and General Investment Account (GIA)s).

An Onshore Bond is subject to the chargeable event regime and therefore is not subject to Capital Gains Tax. In addition, you can withdraw up to 5% of your initial investment (as capital repayments) each year without triggering a chargeable event – your tax deferred allowance.

What’s more, when a chargeable event does occur, top-slicing relief is available. This allows the gain to be taxed as if it had occurred over the time invested, rather than treating the whole gain as taxable income in the current tax year. This can mean that the whole gain could fall into a lower rate of tax.

In addition, an Onshore Bond is treated as having already paid basic rate tax at 20%, even though in reality, the bond will normally have paid less than this. This provides a 20% tax credit against the tax liability, meaning that after top-slicing, any of the gain that falls into additional rate tax will pay 25%, higher rate will pay 20% and basic rate and nil rate gains will have no additional tax liability.

Most bonds are structured into a number of segments (or individual policies), thereby allowing encashments to be made using the most tax efficient method – either utilising the tax deferred allowance or incurring a chargeable event.

Finally, if the holder does have a tax liability, they have the option to assign a bond to a friend or family member with a lower tax liability before encashment. The new owner is then treated as having owned the bond since inception and would quite possibly have no tax to pay.

Onshore Bonds and death benefits

An important consideration for many clients is not just in managing their finances and income during life, but also upon death and within their estate.

At this point, planning can become increasingly difficult, at a time which customers find emotionally challenging.

Many individuals turn to Trusts as part of their inheritance tax planning strategy. In this respect, Bonds can make a great Trustee investment. They offer Trustees a simple, non-income producing asset, with the ability to make use of the 5% tax deferred allowance without a need for tax returns to be produced.

The LV= Smoothed Bond

The LV= Smoothed Bond is an onshore investment bond with access to five risk-rated, smoothed funds managed in partnership with BlackRock.

The Smoothed Bond is a whole of life, with-profits investment and can have up to two lives assured (up to the age of 89). There is no minimum or fixed term, instead the Smoothed Bond is designed to deliver steady growth over the medium to long term. This means clients will typically hold a bond for a minimum of five years, but usually longer.

Through the LV= Smoothed Bond, clients benefit from our unique smoothing mechanism, designed to reduce the impact of market volatility, and provide a calmer investment journey.

Contact your local Business Development Manager or visit our Smoothed Bond webpage to find out more.