Protecting your savings and investments

When you are considering investing capital and then leaving it to your loved ones you have three enemies immediately at your door;

  1. Income tax hungry to take as much as it can from the profit on your investments
  2. Care fees– hungry to take £72,000+ out of your estate (from 2016) before you die
  3. Inheritance Tax– hungry to take 40% of your estate over the £325/£650k threshold after you die

The use of life assurance bonds for your investments can in many cases defeat these three in enemies in one fell swoop.

Income tax

Life assurance bonds are investments offered by life assurance companies and it is this fact that provides them with special tax treatment.

The actual life assurance element will be very small, i.e. usually no more than 1% of the amount invested.

Technically they are ‘single premium whole of life’ policies where the ‘premium’ is the lump sum invested and there is no fixed term.

The Taxes Act 1988 states that single premium life assurance policies cannot be ‘qualifying’ policies and it is the ‘non-qualifying’ designation that gives them their special tax status.

Care fees

The Charging for Residential Accommodation Guidelines (CRAG) clearly states that:-

 “if an investment bond is written as one or more life insurance policies that contain cashing-in rights by way of options for total or partial surrender, then the value of those rights has to be disregarded as a capital asset in the financial assessment for residential accommodation”.

Timing is very important and such strategies need to be employed well in advance of being advised that any need for care may be likely - otherwise they will be considered a ‘deprivation of your assets’.

Inheritance tax

Life assurance bonds can also be used to reduce or remove Inheritance Tax liability when used in conjunction with Absolute or Discretionary Trusts

Trust laws are complex and therefore the correct advice is required when setting up what can be a very effective strategy.

Types of Life Assurance Bond

Distribution Bond

Here the underlying investment would be a Distribution Fund investing in stocks and shares (equities), fixed interest options (bonds) with possibly an investment in property for portfolio balance also.

The dividend income is distributed to the bondholder twice a year usually.

Many people looking for a regular income choose this option – however the income will be variable according to the performance of the underlying investments.

With Profit Bond

Here the underlying investment would be a With Profit Fund. These types of fund smooth out the uncertainties of a Distribution bond and provide a known income. These types of bonds are often seen as a lower risk option and preferred by those wishing to have a known level of income or are a more cautious investor.

Property Bond

Here the underlying investment would be a Property Fund investing in commercial (not residential) properties and in commercial property shares.

Many find this type of investment favourable because returns from commercial property investments are not usually linked to the performance of other assets.

Capital Investment Bond

Here the underlying investment would be one or more unit linked funds set up and managed by either the Life Company or external fund managers.

These types of bonds are designed to give capital growth, income or a combination of the two.

They are medium to long term investments (minimum of 5 years usually) and funds can be drawn down on a regular or one off basis.

Bonds can be opened ‘on’ or ‘off’ shore and this decision will depend on your own attitude and your personal taxation situation.

It is not unusual to have a minimum investment level for these types of bonds set at £10,000; however there tends to be no upper limit.

These types of bonds are often attractive to investors who want to take all available stock market gains but have the option of protecting their existing capital.

The information contained here is in no way to be considered in itself as any form of advice and you should never consider an investment without first consulting an FCA regulated IFA.

Our FCA regulated IFA will be very happy to provide you with further information on the options available to you and once they have looked at your personal situation, they will be able to advise you on a bespoke course of action and product portfolio for you.