Long-term care may be required when people become ill or disabled to the point where they are unable to care for themselves (with the likelihood that the disability will last for a long time). According to the Association of British Insurers, a person reaching 65 today has a nearly 75% likelihood of requiring long-term care services in their remaining years.
Long-term care includes support with basic personal functions such as bathing, dressing, using the toilet, eating, incontinence, and transferring to and from bed or chair, in addition to medical treatment.
It may also be necessary for aid with daily duties such as housework, money management, prescription administration, food preparation and cleanup, grocery or clothing shopping, telephone or other communication device use, pet care, and responding to emergency warnings such as fire alarms.
The rules governing long-term care are complicated.
In general, the local government is in charge of determining an individual’s care needs and financial ability to pay for them.
Each person in need of care will be subjected to a financial’means test’ based on their own assets and income (excluding the applicant’s spouse or civil partner’s assets and income).
Your local government has a maximum contribution rate based on the type and level of care required, and if the cost of the individual’s selected care facility exceeds this maximum, the individual (or their family) will be responsible for the difference.
A means test on capital assets also exists, which establishes an upper limit over which the individual must fund their own fees and a lower limit below which capital can be ignored. Each year, these limits are frequently adjusted. In England, the highest limit is £23,250 and the lower limit is £14,250 as of April 2014. For every £250 of capital above the lower limit, capital amounts in the middle are considered as contributing £1 of additional income. This is referred to as “For the purposes of the income test, tariff income is combined with the individual’s other income.
According to the Care Act of 2014, starting in April 2016, anyone with assets of less than £118,000 would be eligible for assistance with social care costs, with a lifetime cap of £72,000 in place. This does not include ‘hotel charges,’ such as board and lodgings, and the cap will only apply once’substantial’ demands have been proved. According to some actuaries, when these ‘hotel fees’ are factored in, the overall cost of care will be more than twice the £72,000 ceiling (read the article here). Individuals who enter care before April 2016 will still be responsible for paying their own bills if their assets exceed £23,250.
Simply put, life assurance plans (which is what an investment bond is) are typically excluded from the means test for determining long-term care payments.
For local governments, the Department of Health publishes the Charging and Residential Accommodation Guide (CRAG), which explains which assets should be included in the means test. According to the guide:
“…where an investment bond is written as one or more life insurance policies with cashing in rights in the form of entire or partial surrender options, the value of those rights must be ignored as a capital asset…”
However, investing in an investment bond cannot be solely for the purpose of minimizing care costs, as the local authority may claim that deliberate deprivation has taken place.
Individuals who consciously deprive themselves of their wealth or income to minimize the value taken into account for means testing are referred to as deliberative deprivation. The following are some cases of deliberate deprivation:
According to CRAG, if a local government suspects willful deprivation, it should investigate the date of the capital asset’s disposal and the motivation behind it. According to the advice, the desire to avoid the accusation does not have to be the primary motivation, but it must be a substantial one. It would be less fair to believe that deliberate deprivation had happened if the individual was fit and healthy and could not have predicted the need to enter care.
Local governments have no time limit to apply the deliberate deprivation rules if they believe it has occurred. If the transfer occurred within six months before the client moved into the care facility, there are different procedures that allow local governments to recoup care payments from the third party that received the capital asset.
For example, if an elderly person in poor health invests money in an investment bond shortly before filing a claim for local government assistance with care home fees, the authority may well include this money in the means test, despite the fact that investment bonds are normally excluded from the means test.
There are a variety of legitimate reasons why someone could invest in a bond, including tax planning for a more efficient retirement income or just investing assets to keep up with inflation. There would be less opportunity for a local authority to apply the deliberate deprivation principles if evading the means test assessment was not a substantial motive and the client was well and healthy and could not reasonably foresee the need for long-term care.
NB Bonds with no life insurance component, such as capital redemption bonds, will be included in the means test as capital. Withdrawals from a bond on a regular basis will be considered and treated as income.
Do investment bonds qualify as care expenses?
When your local authority conducts a means test to determine how much you’ll pay for your treatment, money held in investment bonds is usually removed from the equation. This is due to the fact that they are viewed as life insurance policies and are ignored.
You can’t put your money into bonds to avoid paying for treatment if you already need it.
Your council will classify this as “deliberate deprivation of assets” and will consider the value of such assets.
- Download a brochure regarding deprivation of assets and the means test from the AGE UK website if you live in England or Wales.
- If you live in Scotland, visit the Care Information Scotland website for more information.
- If you live in Northern Ireland, visit the Age NI website to learn more about asset deprivation and the means test.
Is an Investment Bond a form of life insurance?
Because a portion of your ‘life insurance’ policy might be paid out upon death, investment bonds are frequently classified as a single premium ‘life insurance’ policy, but they’re truly an investment instrument. If you only require life insurance, you should look into other, more specialized solutions.
An investment bond is typically purchased from a life insurance company or through a financial adviser. They will invest your premium for possible capital growth on your behalf, which should grow until you withdraw money from your policy.
Some investment bonds may have a minimum investment duration and fees for early withdrawal. There may be a minimum investment amount, which normally ranges from £5,000 to £10,000.
Types of investment bonds
Onshore and offshore investment bonds are the two primary types of investment bonds. The primary distinction is how they are taxed. Onshore bonds are subject to UK corporate tax, which is offset by your provider, but offshore bonds are issued outside of the UK and the returns roll up gross of tax in the funds, with the exception of Withholding Tax, which is discussed below. Offshore bonds may provide provide a broader range of investment options.
Fixed-rate bonds, corporate bonds, and government bonds are all common types of bonds. Each has its own set of advantages and disadvantages, as well as different tax implications.
Onshore investment bonds
Because UK Investment Bonds are not income-producing investments, they are taxed differently than other UK-based investments. Individuals may be able to take advantage of beneficial tax planning opportunities as a result of this.
The funds that underpin the bond are subject to UK life fund taxation, which means that the amount of your gain is considered as if you had paid Income Tax at the basic rate. This fictitious tax cannot be refunded under any circumstances. Bond gains will not be subject to Capital Gains Tax or base rate Income Tax.
During the life of your onshore investment bond, certain events, commonly known as chargeable events, may result in a potential Income Tax liability:
You can withdraw up to 5% of the amount you placed into your bond each year without paying immediate tax on it; more information is available here.
The maximum rate you’d be responsible for is the difference between the basic rate and your highest rate of income tax for the relevant tax year, because you’re viewed as having paid basic rate tax on the amount of the gain. Gains may alter your eligibility for some tax credits, and you may lose some or all of your personal allowance claim.
If you’re a higher or additional rate taxpayer now but expect to become a basic rate taxpayer later (say when you retire), you should consider postponing any bond withdrawals (in excess of the accumulated 5 percent allowances) until then. You may not have to pay tax on any gains from your bond if you do this.
Offshore investment bonds
Offshore is a term that refers to a variety of locales where businesses can provide consumers tax-free growth on their funds. This covers both “truly offshore” locales like the Channel Islands and the Isle of Man, as well as “onshore” locations like Dublin. Tax treatment differs depending on the type of investment and the location of the market.
Offshore investment bonds are comparable to UK investment bonds in that chargeable events occur on the same events as onshore bonds, with one major exception. Tax is due on profits (and investment income earned) from the underlying assets of the life fund(s) invested in with an onshore bond, however no income or Capital Gains Tax is due on the underlying life fund investments with an offshore bond. However, it’s possible that some Withholding Tax won’t be recouped. Interest and dividends received by the fund are subject to withholding tax (s).
Because an offshore bond is tax-free, it has the potential to grow faster than an onshore bond. However, this isn’t guaranteed, and other factors, such as charges, must be included in any comparisons. However, any profit will be subject to income tax at your highest marginal tax rate. This is because any gain on an offshore bond is not recognized as having been taxed at the basic rate. Gains may affect your eligibility for certain tax credits, and you may lose some or all of your personal allowance entitlement.
When you die, what happens to your investment bonds?
If the dead was the only or last surviving life assured, their death will be a chargeable event, and the bond will be terminated. Any gain will be taxed to the bond owner, and LPRs should include it in the deceased’s self-assessment return for the tax year in which he or she died.
The taxable gain will be calculated using the bond value shortly before death on a chargeable event certificate. The gain is taxed in the same way as any other chargeable gain, and top slicing relief may be available.
The value paid out by the bond provider, on the other hand, may differ from the value used for chargeable event purposes. The amount paid to the estate for some bonds may be dependent on the bond value at the time the provider is notified of the death rather than the date of death, i.e. the bond remains invested until notice is received.
There is no estate tax due for any investment growth between the date of death and the date the bond provider receives news that the life guaranteed has died in this circumstance. Similarly, if the value falls during this time, the LPRs will not be able to compensate for any losses.
A bond provider may charge interest for the time between the bond’s expiration and the payment of the death claim. This will be considered estate income and will be taxed at a rate of 20%.
In addition, the bond may include a tiny amount of life insurance, typically between 0.1 and 1% of the fund’s value. Any increase in the payment for life insurance is not taxed.
When a policyholder dies, the policyholder’s capital redemption bonds and life assurance bonds with additional lives assured remain in force. The LPRs will have a say in how the bond’s value is distributed to the estate’s beneficiaries. They can choose from the following options:
This will be a taxable event, and any gain will be taxed at the basic rate as estate income.
- Onshore bonds – the LPR’s tax due will be satisfied by a 20% non-reclaimable tax credit.
Each beneficiary receiving a part of the bond profits will receive a tax certificate R185 from the LPRs when they distribute the bond funds to them. This certificate verifies the gross amount of taxable income (bond gain) delivered to each beneficiary, as well as the 20% credit for taxes already paid or presumed paid.
Top slicing relief will not be offered because this is viewed as estate income rather than a bond gain. Depending on their personal tax situation, the beneficiary may owe additional taxes or be eligible for a tax refund.
By assigning the bond, ownership can be transferred to the beneficiary without generating a chargeable event. The beneficiary can then decide how and when to relinquish the bond.
Any gains will be assessed as though the beneficiary has owned the bond since the beginning, with top slicing relief available. As a result, assignment is often preferable to surrendering and dividing the earnings to the LPRs.
On the first death, ownership will immediately transfer to the surviving owner. The remaining owner will be assessed the full amount of any future gains. The gains will be taxed as if the survivor had owned the bond from the beginning, with top slicing relief provided.
ISAs
When an investor dies after April 6, 2018, the tax benefits of an ISA can be extended for a limited time. After death, no new money may be put into the ISA, but growth and income will continue to be tax-free while the estate is being settled.
If the deceased ISA holder had a surviving spouse or civil partner, they may be eligible to an extra ISA allowance known as an additional allowed subscription (APS) (APS). This enables them to enhance their own ISA contribution based on the value of the deceased’s plan.
The ISA assets of the deceased are not inherited; rather, an additional ISA allowance equal to the value of the deceased’s ISA is inherited. This additional limit is separate from and in addition to the annual ISA amount of £20,000.
Types of legacy
It’s critical for LPRs to understand their responsibilities in relation to various sorts of legacies that may be included in a will, as well as how these might be distributed tax efficiently.
Pecuniary legacy
A ‘pecuniary legacy’ is when a certain amount of money has been bequeathed to an individual. Only the specified amount is available to the beneficiary. When they get a legacy, they usually don’t have to pay any taxes.
Specific legacy
A’particular legacy’ is when a specific asset, such as property, land, investments, or personal goods, is left to an individual. The beneficiary is entitled to the asset as well as any income generated by it between the time of death and the time it is transferred to them.
Residuary legacy
Individuals may potentially be eligible for a share of the estate’s remaining assets. After all taxes, expenses, and liabilities have been paid, as well as any specific and pecuniary legacies, this is what’s left. A person who inherits a share of the residuary is also entitled to any revenue generated throughout the administration period from their part.
What do investment bonds entail?
A tax-efficient way to hold investments is through an investment bond, which is a single-premium life insurance policy. The value of the bond, like any other investment, may rise or fall based on how well your other investments perform. The investor’s initial money may not be repaid.
What is the taxation of investment bonds?
The chargeable gain is computed in the same way as a full surrender, with the proceeds being the surrender value at the time of death rather than the death benefit paid. This is calculated in the tax year in which the final life assured died.
If a bondholder dies but there are still surviving lives guaranteed on the bond, it is not a chargeable occurrence, and the bond can be continued. The bond must come to an end when the final life assured dies, and any gains on the bond will be taxed at that time. This is why other persons are commonly added as ‘lives assured,’ so that the investor’s heirs can choose whether to cash in the bond or keep it when the investor dies.
Because there are no lives assured, there is no chargeable event on death for capital redemption bonds. When a bond owner passes away, the bond continues to be owned by any remaining joint owners or the deceased’s personal representatives (PRs). If the PRs obtain ownership, they can opt to surrender it or assign it to an estate beneficiary.
Maturity
A capital redemption bond has a guaranteed maturity value at the conclusion of the bond’s tenure, which is usually 99 years. The chargeable gain is determined in the same way as a full surrender, with the proceeds equaling the higher of the bond cash-in value or the guaranteed maturity value at the maturity date.
Assignments
A gift between persons or from trustees to an adult beneficiary is the most common kind of assignment. This assignment is not a reimbursable event. In most cases, the new owner will be treated as though they have always owned the bond for tax purposes.
Money/worth money’s assignments are less common. These are chargeable occurrences, and there are precise laws governing how the assignment is taxed, as well as how the bond is taxed in the new owner’s hands.
Calculating the tax
Any chargeable gains on investment bonds are subject to income tax. There are some distinctions in the taxation of onshore and offshore bonds. This is due to the fact that onshore bonds pay corporation tax on income and earnings within the fund, whereas offshore bonds have a gross rollup with no tax on revenue and gains within the fund.
Onshore bonds are taxed at the top of the income scale, meaning they are taxed after dividends. They are eligible for a non-refundable 20% tax credit, which reflects the fact that the life business will have paid corporate tax on the funds.
For non- and basic-rate taxpayers, this tax credit will cover their liability. If the gain, when aggregated to all other income in the tax year, falls into the higher rate band or above, further tax is due.
Offshore bond gains are taxed after earned income but before dividends, along with all other savings income. There is no credit available to the bond holder because there is no UK tax on income and gains within the bond. Gains are taxed at a rate of 20%, 40%, or 45 percent. Gains are tax-free if they are covered by one of the following allowances:
Savings income, including bond profits, is eligible for the ‘personal savings allowance.’
Top slicing relief
Individuals do not pay tax on bond gains unless they experience a chargeable event. One of the characteristics that distinguishes bonds from other investments is their ability to delay taxes.
When a chargeable event occurs, however, a gain is taxed in the year the event occurs. This can result in a bigger proportion of tax being paid at higher rates than if the gains were assessed on an annual basis.
This can be remedied with top slicing relief. It only applies when a person’s total gain puts them in the higher or additional rate band. The relief is based on the difference between the tax on the full gain and the ‘average’ gain (or’sliced’ gain), and is deducted from the final tax liability. On the Chargeable Event Certificate, the gain as well as the relevant number of years used to calculate the slice will be listed.
Number of years
The length of time will be determined by how the gain was achieved. When time apportionment relief is available, the amount is lowered by the number of complete years the person has been non-resident.
Subtract the chargeable gain from the total number of years the bond has been in force.
The number of complete years is also included in gains on death and full assignment for consideration.
The top slicing period is determined by when the bond was issued and whether it is an onshore or offshore bond.
- Offshore bonds issued before April 6, 2013, will have a top slicing period that goes back to the bond’s genesis if they haven’t been incremented or assigned before then.
- If there have been any past chargeable occurrences as a result of taking more than the cumulative 5% allowance, the top slicing period for all onshore bonds will be shortened. This includes offshore bonds that began (or were incremented or allocated) after April 5, 2013. The number of full years between the current chargeable event and the preceding one will be utilized as the timeframe.
Top slice relief – the HMRC guidance
A deduction from an individual’s overall income tax liability is known as top slicing relief. This is how it will show on HMRC and other accounting software products’ computations.
Budget 2020 includes changes that impacted the availability of the personal allowance when calculating top slicing relief. By concession, HMRC has agreed that these modifications will apply to all gains beginning in 2018/19. If tax has already been paid, those who filed tax returns on the old basis in 2018/19 or 2019/20 will get a tax adjustment and refund.
When calculating the’relieved liability’ (Step 2b below), the personal allowance is based on total income plus the sliced gain. This means that if the sum is less than £100,000, the whole personal allowance may be available. In both step 1 ‘total tax liability’ and step 2a ‘total liability,’ the full gain is applied to calculate the personal allowance.
HMRC’s guidance for gains arising before 6 April 2018 is that the personal allowance will be available if the full bond gain is added to income at all stages of the bond gain computation.
The personal savings allowance will continue to be calculated based on overall income, including the full bond gain.
Furthermore, it has been stated that while determining the amount of top slicing relief that may be available, it is not possible to set income against allowances in the most advantageous way for the taxpayer. For this purpose, bond gains have traditionally made up the largest portion of revenue.
- To assess a taxpayer’s eligibility for the personal allowance (PA), personal savings allowance (PSA), and starting rate band for savings, add all taxable income together (SRBS)
- Calculate income tax based on the typical sequence of income rules, including all bond gains.
- The amount of any gain falling inside the personal allowance reduces the deemed basic rate tax paid.
- Total income plus the slicing gain determines the amount of personal allowance available (for gains on or after 6 April 2018)
- Total income plus the complete gain determines the amount of personal allowance available (current HMRC guidance for pre 6 April 2018 gains)
- Subtract the basic rate tax owed on the sliced gain (both onshore and offshore)
- (total gains – unused personal allowance) x 20% is the considered basic rate tax paid.
What happens to an investment bond after 20 years?
Any unused allowance can be utilized to offset part-withdrawals at any time, even after 20 years. Even though your bond is displaying an investment loss, if you make a part surrender that exceeds your 5% allowed, you will have a taxable gain. Your bond is broken down into 20 to 250 individual policies.
Is it possible to transfer an investment bond to another company?
Investment bonds also have the advantage of being able to be transferred to another individual without incurring a tax penalty. The original owner must get nothing in exchange for the bond if the transfer is intended to save money on taxes. To put it another way, it must be a gift, not a sale or a payment.
This allows the owner to shift the tax burden to someone with a lesser income than themselves, potentially lowering the tax burden on the encashment. It might be their partner, children, or grandchildren. It’s critical that the money doesn’t end up back with the original owner; otherwise, HMRC may interpret the transfer as an attempt to avoid paying tax. It must be given as a gift to another individual, who will be free to do anything they choose with the bond.
Is it a smart idea to buy investment bonds?
Bonds are a safe haven investment. They can give a steady stream of income while also attempting to protect your money. They’re less hazardous than growing assets like stocks and real estate, and they can help you diversify your portfolio. The due date for a loan or investment, as well as all outstanding interest payments.
Are bonds tax-free in the United Kingdom?
According to their tax bracket, an investor can make any of the selections listed above. If a person is in a higher tax rate, they should invest in lower-yielding bonds. You can also invest in higher-income bonds if you have lower tax liabilities. Additionally, the investor may opt to invest based on their risk tolerance.
Whatever the case, all bonds will eventually pay out the amount invested plus some interest paid by the issuer as revenue.
Furthermore, when investing in government bonds, the investor feels more protected. Government bonds, in any form, provide both security and money in exchange.
Identifying chargeable events
Only when a gain on a chargeable event is calculated is tax due. The following are some examples of events that can be charged:
- Benefits on death – If death does not result in benefits, it is not a chargeable event. Consider a bond with two lives assured that is structured to pay out on the second death; the death of the first life assured is not a chargeable event in this scenario.
- All policy rights are assigned in exchange for money or the value of money (Assignment) – A charged event is not triggered by an assignment with no value, i.e. not for’money or money’s worth. As a result, giving a bond as a gift is not a chargeable occurrence. This provides opportunities for tax planning.
- As collateral for a debt, such as one due to a lending organization such as a bank.
- When a policy-secured debt is discharged, such as when the bank reassigns the loan when it is paid off.
- The 5% rule applies to part surrenders.
- When a policy is increased inside the same contract, the new amount triggers its own 5% allowance, which begins in the insurance year of the increment. A chargeable event gain occurs when a part surrender surpasses a specified threshold. Without incurring an immediate tax charge, part surrenders of up to 5% of collected premiums are permissible (S507 ITTOIA 2005). Withdrawals are not tax-free, although they are tax-deferred.
- Part assignments – As previously stated, a chargeable event is an assignment for money or engagement with money. A chargeable occurrence that falls under the ambit of the part surrender regulations is a portion assignment for money or money’s worth. A part-time job for money or its equivalent is unusual, although it could occur in the event of a divorce without a court ruling.
- Policy loans – When a loan is made with the insurer under a contract, it is only regarded a contract when it is given to a person on their behalf, which includes third-party loans. Any unpaid interest charged by the life office to the loan account would be considered extra loans, resulting in partial surrenders.
- If the total amount paid out plus any previous capital payments exceeds the total premiums paid plus the total gains on previous part surrenders or part assignments, maturity (if applicable) is reached.
What you need to know about the taxation regime for UK Investment Bonds
Bond funds, individual bonds, individual gilts, and ETF bonds are all subject to a 20% income tax rate. Bond Funds, on the other hand, pay interest at a net rate of 20%. In other circumstances, interest is paid based on gross valuations, which means it is paid before taxes are deducted.
Furthermore, it should be recognized that if an individual owns more than 60% of an investment fund and receives payment in the form of interest rather than dividends, the investor will be in a tight spot. In this situation, the investor will have to pay the tax at the regular/standard rate rather than that of the dividend rate, which is a huge problem. You will also have to pay interest if your interest rate is calculated using gross valuations.
Capital gains from gilt investments are exempt from capital gains taxes. Even if an investor sells or buys such bonds, the government will not tax the transaction. If a loss occurs, however, the investor cannot simply lay it aside or carry it forward.
If a person invests in or purchases a company’s indexed-linked bonds, he or she will be paid more than the current rate of inflation. Money provided to an investor above the rate of inflation is now taxable. And the investor will undoubtedly be required to pay the sum. Aside from that, there’s the issue of government-issued index-linked bonds. If a person puts their money in the government’s index-linked bonds, they are exempt from paying taxes.
However, if your investment is authorized for an ISA or SIPP, you may be excluded from paying the interest that has been deducted or allowed to be taken. However, it is important to note that there are some guidelines to follow. First and foremost, your bond should be at least five years in length. Furthermore, the amount of money in the account should not exceed the year’s budget. Amounts in excess of this will be taxed. In the United Kingdom, some gilts are tax-free.
Different types of bonds impose different kinds of tax obligations on the income. The interest rate is also determined by the type of bond. Furthermore, bond investments should be made while keeping your tax brackets and risk tolerance in mind. Because taxes and bonds are such a complicated subject, it’s always best to seek professional advice and have a specialist go over everything with you from time to time.