An investment bond is a single premium life insurance policy and is a potentially tax-efficient way of holding a range of investment funds in one place. They can be a good way of allowing you to invest in a mixture of investment funds that are managed by professional investment managers.
Each bond is usually designed to provide benefits for different types of investors but a common element is that they aim to produce long-term capital growth and/or generate a long-term return. When you invest in a bond you will be allocated a certain number of units in the funds of your choice or those set out by the conditions of the bond.
Each fund invests in a range of assets, and the price of your units will normally rise and fall in line with the value of these assets. Investment bonds are single premium life insurance policies, meaning that a small element of life insurance is provided. This is paid out after your death.
No capital gains tax is paid on the gains that you make, and you do not pay basic rate income tax on any income. As a higher-rate taxpayer you may become liable to income tax at a rate equal to the difference between the basic rate and the higher rates (20 per cent), but not until you cash in your bonds or make partial withdrawals of over 5 per cent per annum of your original investment. This is because there is a special rule which allows you to make annual withdrawals from your bonds of up to 5 per cent for 20 years without any immediate tax liability. It is possible to carry these 5 per cent allowances forward, so if you make no withdrawals one year, you can withdraw 10 per cent of your investment the next, without triggering a tax charge.