Understanding the unique taxation of Onshore Investment Bonds
Our HSBC Onshore Investment Bond offers a number of attractive, tax-efficient features:
- Simple Administration. No need to complete a tax return until a chargeable event arises
- Ability to influence the timing of any tax liability
- Ongoing Corporation tax is deducted from the HSBC Onshore Investment Bond Cash Account
- Individual tax calculations with fund tax liability calculated at bond level according to the funds held
- Tax-efficient withdrawals. Onshore investment bonds do not produce income so there are no ongoing Income Tax liabilities
- 5% a year tax deferred withdrawals can be made and may trigger an income tax liability. Any payments over 5% are a chargeable event
- Bond withdrawals can be delayed until they are needed
- Capital gains generated within the Bond are not subject to capital gains tax in respect of the Bond holder
- For inheritance tax planning the ability to have some control and access over capital – subject to the trust solution chosen
- Investment Bond segments can be assigned to provide financial support for family as/when required – to encash with reference to their own personal tax positions
- Ability to place the Bond in trust solutions in the future to support an estate planning strategy
- Charge to Corporation Tax within the Bond is calculated and returned to HMRC
- Fund dividends are not subject to Corporation Tax
- Investment growth within the HSBC Onshore Investment Bond is currently taxed at:
- 19.25% for Income units
- 18.25% for Accumulation units
- 20% tax on growth and income for funds paying an interest distribution
Tax planning opportunities
By planning ahead, your clients may be able to take advantage of opportunities to minimise their tax liability when they take proceeds from their HSBC Onshore Investment Bond.
5% yearly withdrawal allowance
A valuable feature of onshore investment bonds is that investors can take withdrawals of up to 5% of their original investment each year (for up to 20 years) without incurring an immediate liability to Income Tax.
If your client does not use up their allowance in any given year, they can carry it forward for future use. Therefore, by taking withdrawals of up to 5% across each policy in their Investment bond, tax can be deferred until one or more of their policies are fully surrendered or until their 5% allowances have been used up.
The maximum permitted regular withdrawal from the HSBC Onshore Investment Bond is 10% each year.
Your clients should be aware that the amount of any adviser charges deducted from their HSBC Onshore Investment Bond will count towards the 5% withdrawal allowance. However, this does not apply to adviser charges paid directly to you by your client – rather than through the HSBC Onshore Investment Bond.
If the gain from an onshore investment bond pushes an investor into a higher rate Income Tax band they may claim ‘top slicing’ relief which may reduce or remove their liability to higher rate Income Tax on a chargeable event gain.
Each HSBC Onshore Investment Bond is divided into individual policies (up to 1,200) which provides investors with flexibility from a tax planning perspective. Proceeds can be taken across all policies or by fully surrendering a number of individual policies – or through a combination of both.
The most appropriate method of taking proceeds from an onshore investment bond will ultimately depend on the chargeable event rules, prevailing tax rates and the client’s personal tax circumstances.
Personal Savings Allowance
Chargeable event gains can be offset against the Personal Savings Allowance if investors are higher rate taxpayers at the time the chargeable event occurs. However, this is not available for additional rate taxpayers and depends on the amount of any other savings income to be offset.
Personal allowances for higher earners
The personal allowance of higher earners is reduced, or even lost, if their total income exceeds a certain amount – irrespective of age. If income – including the total gain on their investment bond – is below that amount then the Personal Savings Allowance is not affected.
Estate Planning opportunities
If the value of your client’s estate when they die is likely to be more than the current nil rate band of £325,000, the amount in excess of this band will be subject to Inheritance Tax. This Tax is also payable on any lifetime chargeable transfers or lifetime transfers which become chargeable.
Whilst there are some significant reliefs and exemptions available, without careful planning beneficiaries may still receive less than they otherwise might if the estate left to them is reduced by an Inheritance Tax liability.
By insuring multiple lives, a client’s HSBC Onshore Investment Bond can continue until the death of the last surviving life insured. With the option to insure up to 10 lives (from age three months upwards) there is significant flexibility to shelter assets from Inheritance Tax liability over several generations.
HSBC have a range of trust solutions available to help reduce the value of the client’s estate for Inheritance Tax purposes. The client would be a trustee of their trust solution so would be able to exercise control over how the trust fund is invested, and depending on the type of trust used, have control over when a beneficiary can benefit from the trust. Depending on the trust solution chosen the client may also have access to regular payments from the trust. The use of the trust will avoid the need for probate on the client’s death so funds can be made available to the beneficiaries more timely.
Each HSBC trust solution uses the HSBC Onshore Investment Bond as the trust investment and the client can choose either discretionary or absolute trust versions. All the trust solutions provide Inheritance Tax mitigation.
The HSBC trust solutions are:
HSBC Discounted Gift Trust – capital is placed in trust, part of which falls outside the Inheritance Tax estate provided the client lives for 7 years and part should fall outside the estate immediately. The client retains access to regular payments from the trust during their lifetime or until the investment runs out.
HSBC Loan Trust – a cash sum is loaned to the trust, which is invested and any growth on that investment is outside the client’s estate for Inheritance Tax purposes. The client may take regular repayments of their loan to supplement their income. Any outstanding loan remains in the client’s estate on death for Inheritance Tax purposes.
HSBC Gift Trust – capital is placed in trust and this falls outside the client’s estate for Inheritance Tax provided the client lives for 7 years. The client has no access to money from the trust. The client would be a trustee of their trust so would be able to exercise control over how the trust fund is invested, and depending on the type of trust used, have control over when a beneficiary can benefit from the trust.