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Withdrawals from an onshore bond


One advantage of an investment bond is that withdrawals of 5% of the original premium can be taken each year (for up to 20 years) without incurring an immediate tax liability. The 5% allowance is cumulative, which means that if it is not taken in one year, the undrawn allowance is added to future years’ allowance. 

This tax deferred allowance allows the bond owner to access capital without any need to account for income tax or make a self-assessment tax return.

Commonly, a bond owner will try and ensure withdrawals do not exceed the 5% tax deferred allowance. However, in some circumstances, they may need to make a larger withdrawal. Doing so will always result in a chargeable event.

To ensure maximum flexibility and ensure funds can be realised in the most tax efficient manner, most providers segment investment bonds into a number of individual cluster policies. 

Example – Belinda

Belinda purchased an investment bond on 1 March 2020 for £100,000 and has not made any withdrawals. On 1 August 2023 (during year 4), the bond is worth £125,000 and Belinda decides to make a withdrawal of £30,000. 

Belinda’s bond is split into 50 individual cluster policies. She therefore has the following options: 

1. Take equally across the policies

Withdrawal of £30,000, less

Cumulative 5% tax deferred allowance (£5,000 x 4 years) = £20,000 

Chargeable gain = £10,000

2. Encash individual policies in full

Purchase price of individual cluster policy (£100,000/50) = £2,000

Current value of individual cluster policy (£125,000/50) = £2,500

Gain on each individual cluster policy (£2,500 - £2,000) = £500

Number of cluster policies to be encashed (£30,000/£2,500) = 12

Chargeable gain (£500 x 12) = £6,000

3. Combine tax deferred allowance with encashing individual policies

Total available 5% tax deferred allowance (£5,000 x 4) = £20,000 

Available 5% tax deferred allowance for individual cluster policy (£20,000/50) = £400

Value of individual cluster policy after tax deferred allowance (£2,500 - £400) = £2,100

Number of cluster policies to be fully encashed (£10,000/£2,100) = 5 (rounded up)

Chargeable gain (£500 x 5) = £2,500*

* Total withdrawal will be £30,500 under option 3

Although option 3 produces the lowest chargeable gain, Belinda may wish to evaluate her tax liability after top-slicing relief in each scenario. If there is no tax liability, Belinda may decide that it is preferable to incur a larger chargeable gain now, on the basis that this may result in a lower chargeable gain at a later encashment. 


Splitting a bond into a number of cluster policies provides additional flexibility when partial surrenders are made. Where a chargeable gain would take the bond owner into higher rate tax, this allows for the notional gain to be reduced and any tax liability kept to a minimum.

Alternatively, where the owner is a basic rate tax payer and any gain is unlikely to incur a further tax charge, the withdrawal can be structured to maximise the gain now, which can reduce a future chargeable gain when the bond is eventually surrendered.

Another way of reducing the tax charge is to assign the bond to a lower rate tax payer (such as a spouse) before encashment. Although for some individuals, this may not always be practical.

Important Information

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.