The benefits of gifting!
However, when deciding where to invest money, it’s important to consider how the funds will eventually be used. Often, an investor may wish to help their wider family over time. For gifting, investment bonds can hold some clear advantages over other investment vehicles.
Case study - Angus & Lana
Angus (68) and Lana (64) have recently retired. They are financially secure, with untouched pension and ISA investments, plus sufficient pension income to meet their needs. Recently, they made a decision to sell two rental properties they own, raising £500,000.
They do not expect they will need the £500,000 themselves. Instead, they largely intend to use the money for the benefit of their children and grandchildren. However, they are not comfortable gifting such a large amount away now, as they are wary that the money could be wasted. Instead, they would like to help their family as and when they need it, plus pay for family holidays that they will hopefully be included on!
For Angus and Lana, an investment bond provides an ideal investment. This is because they will be able to:
- Take regular withdrawals – They can withdraw up to 5% (£25,000) of the original investment each year without an immediate tax liability or need for a tax return. This should be more than sufficient to take the wider family on holiday each year, pay for one-off expenses or provide gifts to family as and when needed.
- Make larger gifts – If they wish to make larger gifts at any point, they can assign all or part of the bond to another family member. This gift will not require the bond to be encashed or cause any immediate tax liability, even if they switch investment choice. On any future encashment, it will simply be treated as if the new owner had always owned the bond for the purposes of a chargeable event - If the recipient of the gift is a nil or basic rate tax payer, top slicing relief can mean that they will have no further tax to pay.
- Conduct estate planning – Angus and Lana are both in good health and are just starting their retirement journey, so are currently not too concerned about inheritance tax planning at the moment. Later on, this is likely to be more of a concern. At that point, they will have the option of gifting (assigning) the investment bond either into trust or directly to a family member, so as to remove it from their estates. As before, this will not require an encashment or create an immediate tax liability and it will be treated as if the new owner had always owned it for chargeable event purposes. The trust or recipient would then have the option of assigning on to someone else before encashment if that was tax beneficial.
Making a clinical comparison of a client’s overall tax position within different investment vehicles can hide the true advantages of an investment bond.
This is because the eventual tax liability for the bond does not need to be based on the original investor. Instead, regular withdrawals can be made using the 5% tax deferred allowance, with the bond assigned to the most suitable party before any chargeable event tax liability occurs.
This allows a bond to easily be gifted between a family without dealing costs or immediate tax charges on capital gains. It also provides the ability to use the income tax allowances of lower earning family members when any chargeable gain is eventually incurred.
Please note this is for general information only and is based on LV=’s understanding of the relevant legislation and regulations and may be subject to change.
The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.
The use of this document is at your own risk, and the content should not be used for the provision of professional advice.
LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.