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Tax Benefits

Individual investors

Virtually tax-free growth

As we're a Dublin-based company, our policyholders' funds aren't liable for any Irish tax on investment growth, although some investment income may have been subject to an irrecoverable withholding tax when received.

Tax deferral

You don't have any liability to tax until a chargeable event occurs (see below). Until then the bond grows virtually tax free, unlike onshore bonds where the fund is taxed yearly. This can give you greater control over the timing and amount of any future tax charge. For example, you could put off paying tax until you've moved into a lower tax bracket or even moved to a different tax jurisdiction.

What tax applies?

You'll be liable to your highest effective rate of income tax on any chargeable gains. Please note: if you're the original investor in a life policy you're not personally liable to CGT - unlike, say, investing direct in a portfolio of unit trusts.

Chargeable events

For an offshore bond the main events which will trigger a tax liability are:

  • partial withdrawals above the 5% allowance (see below)
  • full cash-in (surrender) of one or more policies
  • assignment of a policy for money or money's worth
  • death of the last life assured

Significant changes to the policy can also trigger a chargeable event, for example changing a life assured.

Reporting gains

For chargeable event gains we're required (under the Overseas Insurers (Tax Representatives) Regulations 1999 and Amendment Regulation 2001) to provide each policyholder with a chargeable event certificate. We only need to send a copy of the certificate to HM Revenue & Customs if the gain is greater than one half of the higher-rate threshold. You must report all chargeable gains to HM Revenue & Customs if required under self-assessment or if a tax liability arises.

What gain is taxable?

If you cash in your bond then, broadly speaking, the gain liable to tax will be:

  • the bond value when cashed in or any proceeds, plus any previous withdrawals, less
  • the amount invested, plus any previous chargeable gains

If there's a partial withdrawal above the 5% tax-deferred allowance, the gain liable to tax is the full excess over the available cumulative allowance

More about the 5% allowance

  • Each year you can take 5% of the amount invested with no immediate tax charge.
  • You can carry forward any unused allowance to subsequent years.
  • The allowance continues until it's cancelled out the amount invested.

Partial cash-ins/withdrawals

You can take payment from the bond either by cashing in complete policies or by a partial withdrawal across all policies. There are no set rules about whether one method is more tax efficient than the other. So it's important to check the tax outcome of each method before taking the payment. You should consider factors such as the length of time the bond has been in force, available 5% allowances and any cash-in charges.

Top-slicing

Top-slicing can be an important relief for you if you're not normally a higher rate taxpayer. It's used to determine if there's a higher rate income tax liability on the gain. First, the whole gain is taxed at your marginal rate, up to and including basic rate. Then the total gain is divided by the number of complete years the bond has been in force, which determines the 'slice'. This is then added to other taxable income for the year to work out if there's a higher rate tax liability and, if so, to what extent.

Once any higher rate liability on the slice has been calculated, it must then be multiplied by the number of years in force to determine the higher rate liability on the whole gain. Offshore bonds have a distinct advantage over onshore bonds when it comes to top-slicing. For onshore bonds the gain is only top-sliced back to the last chargeable event, except on final surrender when the gain is top-sliced back to the start of the bond. But on an offshore bond the gain is always top-sliced back to the start of the bond.

Potentially, this will mean the gain will be divided by a greater number of years, leading to a smaller slice.

Age allowance and other income-related tax benefits

If you're aged over 65, you enjoy a higher personal allowance. But this enhanced allowance only applies if your income is below a certain amount. You should take care with the timings and amount of any cash-ins or withdrawals from a bond. Any amounts withdrawn within the cumulative 5% allowance don't affect age allowance. On the other hand, when a chargeable event arises, the full amount of the gain will be added to other income to calculate the extent of age allowance for that tax year. The same is true of other income-related benefits such as child tax credit.

Income tax planning

One major advantage of life bonds is that they can be gifted to other adult individuals without incurring an income tax liability. This may be if you want to transfer capital to other individuals - perhaps for inheritance tax-planning purposes.

For income tax purposes, the new owner is treated as if they've always owned the bond. This may mean that the bond gains are taxed when it's cashed in, at a lower rate than that of the original owner. This income tax mitigation can only work if the capital genuinely becomes the new bond owner's.

Always seek advice before making an investment choice.

Please note, AEGON Secure Lifetime Income is not treated as an offshore bond.