What is an Investment Bond – and Should You Consider One?

With the reduction in Capital Gains Tax (CGT) allowances (see my separate blog post for more on this), I’m increasingly discussing Investment Bonds with clients as a potential tax-efficient investment option.

So, What is an Investment Bond?

In simple terms, an Investment Bond is a single-premium life insurance policy into which you invest a lump sum. That money is then invested across a range of funds aligned to your attitude to risk, financial needs, and objectives.

Over time, the investment may grow in value, and you have the flexibility to withdraw money as and when you need it.

While it sounds straightforward, there are several key features—particularly around tax—that are worth understanding.

How Are Investment Bonds Taxed?

Investment Bonds are funded using money that’s already been taxed (e.g. from your salary or savings). One of the standout features is that you can withdraw up to 5% of your original investment each year without triggering an immediate tax liability. Even better, if you don’t use your full 5% allowance in a given year, it can roll over—so if you took nothing in year one, you could withdraw 10% in year two. These are known as tax-deferred withdrawals.

Importantly, you don’t pay Capital Gains Tax on Investment Bonds. Instead, any tax due is based on income tax rates, and only when you withdraw more than the accumulated 5% allowance or surrender (encash) the bond entirely. If you stay within the allowance, there’s no need to include it in your tax return.

Key Advantages of Investment Bonds

• No Capital Gains Tax: Switching funds within the bond doesn’t create a CGT event, unlike with General Investment Accounts (GIAs).

• Tax deferral: Withdraw up to 5% per year without immediate tax liability.

• Estate planning benefits: Bonds can be written in trust or assigned to beneficiaries, helping to manage inheritance tax and control access.

Some Potential Drawbacks

• Higher income tax: Gains are taxed as income, which can be higher than CGT rates.

• Charges: Investment Bonds may come with higher charges than direct fund investments.

• Less flexibility: Compared to ISAs or pensions (though ISAs and pensions have annual contribution limits).

Real-Life Case Studies

To bring this to life, here are two recent examples where Investment Bonds played a useful role in different financial planning scenarios:

Case Study 1: Setting Up a Trust for a Minor

I recently arranged an Offshore Investment Bond to hold funds within a trust for a minor beneficiary who won’t need access for at least 10 years. By using a bond:

• There’s no need for complex annual trust tax returns.

• When the time comes, the assets can be assigned to the beneficiary, who will likely be a basic-rate taxpayer.

• The gains can then be spread over multiple tax years, reducing the overall tax liability.

Case Study 2: A Tax-Efficient Lump Sum Investment

A mature couple had £300,000 to invest with no plans to access the funds themselves—it was intended for their children in the future.

• If they’d used a GIA, any growth over the £3,000 CGT allowance per person would have been taxable and reportable annually.

• With the Investment Bond, they avoid annual CGT reporting and can defer tax until the money is eventually accessed, potentially by their children at lower income tax rates.

Could an Investment Bond Be Right for You?

Investment Bonds won’t suit everyone, but they can offer significant tax planning advantages in the right circumstances. If you're interested in exploring whether one could fit into your financial strategy, please don’t hesitate to get in touch.

• This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

• The favourable tax treatment of ISAs may be subject to changes in legislation in the future.

• Past performance is used as a guide only; it is no guarantee of future performance.

• The value of investments and any income from them can fall as well as rise. You may not get back the full amount invested.

• The taxation of the investment is dependent on the individual circumstance of each investor, and may be subject to change in the future.

• The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning or Trust Advice.