Investment bonds are investment products offered by life companies and are usually made available for lump-sum investments. You can choose how that money is invested from a range of options that combine a variety of different asset classes within the one fund. Some life companies offer external links to fund management houses, increasing your scope to mix, match and specialise within your portfolio.

When you take out an investment bond, your income and gains within the bond are subject to basic rate tax. Therefore, if you are a basic rate taxpayer, you will pay no further tax on any gains. If you are a higher rate taxpayer, however, you will pay an additional 20% on the total profit when the bond is cashed in.  Nevertheless, there are ways to mitigate this. For example, under income tax deferral rules, you can withdraw up to 5% of the investment’s initial value every year for up to 20 years – i.e., up to 100% of the initial investment – without immediately becoming liable for additional tax. This postponement of the tax liability can be particularly advantageous if you are a higher-rate taxpayer now, but expect to become a basic rate taxpayer in future. When the investment bond is finally cashed in, you become liable for the higher rate tax bill. However, if you postpone this encashment until you are paying basic rate tax, you could actually end up with no further liability at all.

Many people will have taken out investment bonds during the 1990s and 2000s. They were often useful at that time because the tax environment was very different. In particular, capital gains tax was 40% and there was a small annual exemption that could make a small portfolio of investments subject t a high tax charge quickly. These days, with higher capital gains tax allowances, lower tax rates and significantly higher ISA allowances, many people will find that their investment bond could actually be tax inefficient.

If you have an investment bond that needs to be reviewed and you would like to discuss your options, please contact us today by telephone on 01626 242500 or email

WBW has offices in TorquayPaigntonNewton AbbotExeterBovey Tracey,  Exmouth,  Honiton,  Sidmouth,  Launceston,  AxminsterChard and Seaton.

This article is intended to provide information only and reflects our understanding of legislation at the time of writing. Before you make any decision, we suggest you take professional financial advice.