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Which is the best Investment Bond?

Which is the best investment bond seem an easy task. It quickly becomes more difficult once you discover that it is what is inside the investment bond that counts. If you invest in an investment bond the value of the funds within will go up and down. At Woodward Financials, we use an active investment approach that has proven, in difficult market conditions, to give returns that would satisfy many investors that sought out the best investment bond performance.

What is an investment bond?

An investment bond is a single-premium life insurance policy which is usually used to hold investments in a tax-efficient way. Investment bonds have tax rules that determine how they work and when you might have to pay tax. Investment bonds give you the potential for medium to long-term growth on your money, usually over 5-10 years or more.

Some investment bonds require a minimum investment term and may apply charges for cashing the investment bond early. It is therefore of utmost importance that you can afford to put your money away for the medium to long term before choosing to invest in an investment bond.

How does an investment bond work?

Upon opening an investment bond, a lump sum is deposited. This lump sum is then invested in a variety of shares, bonds, funds, investment trusts and many more, with the aim of increasing the value over time. When you cash in an investment bond, the amount you get back depends on how well the investments within have performed.

What different types of investment bond are available?

There are two types of investment bonds, onshore and offshore. The main difference is the way they are taxed.

Onshore (or UK) investment bond

The funds within an onshore investment bond are subject to UK corporation tax. The bond itself is treated as a non-income producing investment which means that it has different tax treatment to other investments. This can provide valuable tax planning opportunities.

HMRC treat the tax paid as being the same as the basic rate income tax. This means that when the bond matures or is encashed, basic rate taxpayers will not have to pay any more tax. Higher or additional rate taxpayers, or people that become one when the bond is encashed, could incur a tax liability. However, a financial adviser will be able to discuss this in more detail.

Offshore investment bond

An offshore investment bond is a bond issued by a company outside the UK, usually with favourable tax regimes such as the Channel Islands or the Isle of Man. This means that the funds within are not usually taxed in the same way as an onshore investment bond and therefore the bond value has the potential to grow faster than the onshore bond.

When the bond matures or is encashed, you will pay income tax at your highest marginal rate as the bond itself has not paid any tax.

Tax efficient withdrawals

Both onshore and offshore investment bond have what is know as the 5% tax deferred allowance. This means that you can withdraw up to 5% of the initial investment each year without incurring an immediate tax charge. The withdrawals themselves are treated as return of capital rather than income, therefore deferring any income tax liability until the bond is encashed or matures. Any year that the 5% allowance is not withdrawn can be carried over to another tax year.

Deferring income tax in this way can be helpful to higher and additional rate taxpayers. This is because they can delay any payments until their circumstances change, such as becoming a basic rate taxpayer or in retirement, which in turn reduces their tax liability.

In any year that the 5% tax deferred allowance is exceeded, a chargeable event is triggered. The excess amount is treated as a chargeable gain and may be liable to income tax.

Top slicing relief on investment bond gains

Top slicing relief is available where part of your income would be liable to a higher tax rate once you include a gain. If a gain does not move you into a higher tax rate, there may still be some top slicing relief available because of the personal savings allowance nil rate and the starting rate for savings.

If top slicing relief applies to you, it may be possible to get a reduction on the tax payable. HMRC have a process for calculating this which can be complex, and it is always advisable to speak to a financial adviser to understand more about how this works.

Means assessment for long term care fees

Investment bonds typically have a life insurance element meaning bonds may be excluded when local authorities calculate long term care fees.


Typically, an investment bond is one of the most tax efficient investments to hold in trust.

Things to consider before opening an investment bond

The most important thing to consider before opening an investment bond is what the money is for. Once you know this, you can determine which investment bond is best suited to your needs.

Investment bonds are also an excellent way to gift money in to trust in a tax efficient way. Any gains made on the bond immediately fall outside of a client’s estate and in some cases, there may be no inheritance tax due on the trust fund.

Woodward Financials were awarded best wealth management firm in 2021 and again in 2022 who have a team of advisers ready to help you determine whether an investment bond is right for you and help you make the right decision for you.

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For more information you can contact David on 01753 839348 or email