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Investment bonds – chargeable events

Introduction

This briefing explains when a chargeable event arises on an investment bond.

Core considerations

  • Investment bonds are subject to a distinct tax regime set out in Chapter 9, Part 4 of the Income Tax (Trading and Other Income) Act 2005.
  • A chargeable event arises on the happening of various events, such as death, maturity, full surrender or a partial surrender, or assignment for consideration.

Contents

Chargeable event regime

Both onshore and offshore investment bonds/capital redemption policies are non-qualifying policies and chargeable event gains made on them are potentially subject to income tax. 
 
The charge to income tax can arise whenever a chargeable event occurs which gives rise to a chargeable gain.
 

When does a chargeable event arise?

The following events will give rise to a chargeable event on an investment bond:

  • Death giving rise to the payment of benefits (not applicable to capital redemption policies as there are no lives assured). For a single life bond, the death of the sole life assured gives rise to a chargeable event. Under joint life policies a chargeable event will arise on the death of the first life to die or the last life to die depending on the terms of the policy. 
     
  • Maturity - capital redemption policies have a fixed term until the maturity date e.g 99 years. An investment bond that is a whole of life policy does not have a maturity date. 
     
  • Part surrenders including regular withdrawals. Each policy year a policyholder can withdraw up to 5% of the investment amount/premium without an immediate liability to income tax, this is known as a tax deferred allowance. Care should be taken regarding withdrawals that are paid as adviser charges as these withdrawals will also be taken into account when determining the available tax deferred allowance. A maximum of 100% of the investment amount/premium can be withdrawn in this way. 
     
    For example

    A policyholder can withdraw 5% a year for 20 years, or 4% a year for 25 years without a chargeable event occurring. Any unused allowance can be carried forward to be used in future years. If, however, more than the allowable withdrawal amount is taken this will give rise to a chargeable event at the end of the policy year that it was taken.     
  • Surrender of the whole bond or individual segments/policies. When a bond is set up on a segmented basis each individual segment is treated as a separate investment bond in its own right. It is therefore possible to fully surrender individual segments creating a final chargeable event gain in respect of those segments, while the remaining segments continue in force, or surrender the whole bond. The chargeable event arises on the date the surrender takes place.
     
  • Full or partial assignment for money or money’s worth. A full or partial assignment of the rights under a policy for consideration in money or money's worth between connected persons, e.g. father and son, will be treated as being for consideration equal to the market value of the policy (this would generally be the surrender value) whereas, an assignment by way of gift does not give rise to a chargeable event. However, an assignment of part of the rights under a policy by way of gift is still relevant as it represents a change in ownership. A part assignment for money or money’s worth is dealt with in the same way as a Part Surrender, for chargeable event purposes.
     

  •  An assignment is not treated as being for money or money’s worth if it is in connection with a divorce and is subject to the terms of a court order

    - for ancillary relief under the Matrimonial Causes Act 1973 or the Family Law (Scotland) Act 1985, whether before or after the divorce is final; or
    - formally ratifying an agreement reached by the divorcing parties dealing with the transfer of property.

    If the assignment is not supported by a court order then it would be treated as being for money or money’s worth and so give rise to a chargeable event.

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