Investment bonds – fund taxation
Introduction
This briefing explains how an investment bond fund is taxed.
Core considerations
- Investment bonds offer a wide choice of funds but have their own distinct tax treatment.
- Onshore bonds are deemed to have paid basic rate tax in the fund.
- Offshore bonds do not suffer any tax in the fund.
Contents
Onshore bonds
The taxation of the fund is complex but broadly, the underlying income and capital gains of policyholder funds held by insurance companies are subject to corporation tax at the basic rate of 20%. There is no tax on UK dividend income but foreign dividends may have paid withholding tax. This means that when determining whether there would be more income tax payable on a chargeable event gain, a basic rate tax credit is given for the tax already deemed to have been paid.
Offshore bonds
With an offshore bond, there’s usually no UK tax or local tax and the fund rolls up gross. This also means no tax is deemed to have been paid within the fund and so any chargeable event gain will be subject to income tax for the investor unless it is covered by their available personal allowances. In the case of trustees, the chargeable event gain will always be taxable to income tax.
Switching funds
For both, onshore and offshore bonds, a wide choice of funds are generally available, and it is possible for the investor to switch between funds with no tax implications.
Summary
| Onshore bond | Offshore bond | |
|---|---|---|
|
Taxation of the underlying investment fund |
Fund subject to corporation tax at 20% on income and capital gains. No tax on UK dividend income. |
No UK tax/no local tax on the fund (usually) - gross roll-up. Possible unreclaimable (depending on double tax treaty) withholding tax on dividends. No local/UK fund taxation on capital gains. |
|
Switching between different investment funds |
No tax. | No tax. |