#Bond finance definition free

HMRC have a process for calculating this which can be very complex, so if you would like to understand how this works, please speak to your financial adviser.

If top slicing relief applies, you may get a reduction on the tax payable on a chargeable event gain. If a gain doesn’t move you into a higher tax rate, there may still be some top slicing relief available due to the effect of the personal savings allowance nil rate and the starting rate for savings. Top slicing relief can assist in reducing the rate of tax charged on bond gains by applying a spreading mechanism and is generally available where at least part of your income would be liable to a higher tax rate once you include a gain. Top slicing relief for gains on Onshore and Offshore bonds This is because on an offshore bond you're not treated as having paid basic rate tax on any gain. The gains may also affect your eligibility for certain tax credits and you could lose some or all of your entitlement to personal allowances. But, note that you will pay income tax on any gain at your highest marginal tax rate. The lack of tax on an offshore bond means that potentially it could grow faster than one that is onshore, although this isn't guaranteed and the effect of other factors, such as charges, need to be taken into account in any comparisons. Withholding Tax is deducted from interest and dividends received by the fund(s). However, there may be an element of Withholding Tax that can't be recovered. With an onshore bond, tax is payable on gains made (and investment income received) from the underlying investments of the life fund(s) invested in, whereas with an offshore bond no income or Capital Gains Tax is payable on the underlying life fund investments. Offshore investment bonds are similar to UK investment bonds, as chargeable events occur on the same events described above for onshore bonds but there is one main difference. Tax treatment can vary from one type of investment to another, and from one market location to another. This includes 'true offshore' locations such as the Channel Islands and the Isle of Man, and other locations such as Dublin.

#Bond finance definition free

Offshore is a common term that's used to describe a range of locations where companies could offer customers growth on their funds that's largely free from tax. Special rules apply to trustee held bonds. Life assurance bonds held by UK companies fall under different legislation.

If you do this, you may not need to pay tax on any gains from your bond. If you're a higher or additional rate taxpayer now but know that you will become a basic rate taxpayer later (perhaps when you retire for example) then you might consider deferring any withdrawals from the bond (in excess of the accumulated 5% allowances) until that time. The gains may also affect your eligibility for certain tax credits and you could lose some or all of your entitlement to personal allowances. You can withdraw up to 5% each year of the amount you have paid into your bond without paying any immediate tax on it, more information on this here.Īs you're treated as having paid basic rate tax on the amount of the gain, the maximum rate you would be liable for is the difference between the basic rate and your highest rate of income tax for the relevant tax year. You will have no liability to Capital Gains Tax or basic rate Income Tax on bond gains.Ĭertain events, also known as chargeable events, that can occur during the lifetime of your onshore investment bond may trigger a potential Income Tax liability: This notional tax is not repayable in any circumstances.

The funds underlying the bond are subject to UK life fund taxation meaning that you're treated as having paid Income Tax at the basic rate on the amount of your gain. This can provide valuable tax planning opportunities for individuals. UK Investment Bonds are non-income producing investments and so have a different tax treatment from other UK based investments. Each have their own benefits and risks and the tax situation of each can vary. Other common types of bonds include fixed-rate bonds, corporate bonds and government bonds. In high-level terms, those onshore are subject to UK corporation tax, which is offset by your provider, while offshore bonds are issued from outside the UK and the returns roll up gross of tax in the funds, apart from Withholding Tax, as described below. Offshore bonds may also offer a wider choice of funds. The main difference is their tax treatment. Investment bonds mainly fall into two categories, onshore and offshore. Because tax rules can change, the impact of taxation (and any tax relief) depends on your individual circumstances.