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How is an onshore bond taxed? What is an onshore bond? Onshore bonds are lump sum life assurance policies which are established within the United Kingdom. The amount of life cover is minimal, and onshore bonds are taken for investment growth and not life cover. These policies offer you the opportunity to invest in pooled or collective funds that provide access to a wide range of investments. The funds are managed by professional investment mangers, which should increase your return and reduce the risk your investments are exposed to. Back to start of page How is an onshore bond taxed? | Drawings of up to 5% of the sum invested in the offshore bonds and onshore bonds is not included in your income tax calculation because HMRC sees it as a "return of your capital". | | The Life Company pays tax on income and capital gains accrued within its funds. The Inland Revenue regard payment of this tax as equivalent to you having paid Capital Gains tax and Basic Rate Income Tax, so you have no personal liability to Capital Gains Tax or Basic Rate Income Tax on the proceeds from your Bond. However, the tax paid by the Life Company is not reclaimable if you are a basic rate or non taxpayer. | A liability to Higher Rate Income Tax may arise if a chargeable event occurs and a chargeable event gain or ‘profit', arises. You can take regular withdrawals from onshore bonds, accessing your capital in a tax efficient way by withdrawing up to 5% of the amount initially invested every year as "income".
This 5% amount can be taken every year for 20 years, or accumulated over a number of years and withdrawn less frequently without triggering a 'chargeable event 'for tax purposes (a 'chargeable event 'occurs for example when an amount over 5% a year is withdrawn, or if the bond is cashed-in in full, triggering a potential income tax charge). Back to start of page You can choose or exercise control over when a ‘chargeable event' occurs. The tax payable at the point of a chargeable event will depend on your highest marginal rate at that time. This allows you to defer such an event until you are either no longer a tax payer or have moved from being a higher rate tax payer to a lower or basic rate tax payer.
Fund switches made within onshore bonds do not trigger a capital gains tax liability. Such switches within a portfolio of onshore direct equity or unit trust investments trigger a potential capital gains tax liability for the tax year in which the switches were made. Onshore bonds often therefore provide a more tax efficient structure for active investment management. Back to start of page
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