Bonding Issues

Four cases have come across my desk recently where similar looking arrangements turned out to have very different tax consequences.

All involved investment bonds. Bonds are generally sold as straightforward, tax efficient investments.

A major selling point is that you can make 5% annual withdrawals, tax free. Another selling point is that with “onshore” bonds any excess over the 5% is deemed to carry a basic rate tax credit.

There can also be inheritance tax benefits. Dig below the surface however and things quickly become more complicated.

The problem I have faced with these four recent cases is that in each case the original paperwork disappeared many years ago, the adviser who sold them is long retired and the investment companies have been reluctant to assist.

My first piece of advice if you have a bond or are about to take one out is to make sure that you keep all of the original paperwork, including the product particulars and any tax information that you are given by the financial adviser.

This is even more important with the advent of the General Data Protection Regulation (GDPR), which will serve to limit the amount of information your advisers can keep and the time for which they can keep it.

GDPR is the reason that you will have received letters and emails over the past few weeks from businesses asking you to confirm that they can continue to send you information.

My second piece of advice is to make sure that you fully understand the tax consequences of holding a bond. There are differences between the treatment of “onshore” and “offshore” bonds for example.

It is also a little misleading to say that 5% withdrawals are tax free: what is tax free is the return of your original investment capital if you take it back at a rate of no more than 5% a year.

When you or your executors ultimately encash the bond, all earlier withdrawals will be added back to establish the overall gain for tax purposes.

You should always take advice before encashing - or even making partial withdrawals from - a bond. The tax effects can be unexpectedly harsh if you get the timing or method wrong. And remember that guaranteed income may be at the expense of capital.

Bonds can be very effective in tax planning but they can also give rise to unexpected consequences. Professional advice is essential – so is keeping all of the paperwork safe.

Paul Aplin is a tax partner with A C Mole & Sons and Deputy President of the Institute of Chartered Accountants in England and Wales; you can follow him on Twitter at @PaulAplinOnTax or email him at