Investment bonds - Time to seek advice?

Holders of single premium investment bonds are being advised to seek professional financial advice in the wake of last week's Budget, which saw changes to the rate of capital gains tax (CGT).

In his first Budget as Chancellor of the Exchequer, Alistair Darling reduced CGT to 18%, making investment in onshore investment bonds - which are taxed under the income tax regime and can therefore be taxed at up to 40% - a less attractive option when compared with investments in unit trusts and other collective investments, where gains are taxed under CGT rules.

Taxing and irrelevant

Until now, the fact that bonds are taxed under the income tax rules was largely irrelevant, when capital gains tax was linked to a person's marginal rate of income tax anyway.

After April 6, when the new tax regime comes in, even basic-rate income tax payers will pay more tax on investment bonds than on other equity investments, even though the basic rate of income tax has also been cut - but only to 20%.

According to Standard Life, as many as 200,000 bondholders could find themselves affected by this situation.

Darling ignores industry calls

Mr Darling ignored calls from the insurance industry for a lower rate of CGT for long-term bond holders investing in equities, The Budget report confirmed: "The Government does not see the need for any change to the taxation of life insurance bonds as a result of CGT reform."

Now the Association of British Insurers is urging people who hold life assurance investment bonds to seek specialist advice, saying both advisers and their clients will need to consider the implications of the changes to the tax regime.

Confusion and uncertainty for savers

It said in a statement: "The Government's lack of consultation over the effect of the CGT changes has caused confusion and uncertainty for savers and the insurance industry alike."

Peter Vipond, the ABI's director of taxation, added: "The Government's CGT proposals were made without consideration of the impact on consumers who hold investment bonds and the wider consequence for savers. In future, the Treasury should deliver better analysis and consultation."

A spokesman for the Financial Services Authority said, however, that he was convinced the 'professional expertise' of IFAs would ensure that client portfolios are reviewed. The tax change is nevertheless almost bound to affect the prospects for sales of investment bonds, and anyone who holds bonds would be advised to make sure that continuing to hold them is the right thing to do.

Don't panic

Investors should not, however, panic and act hastily, because encashing a bond could involve more than advisory fees. Many bonds carry exit penalties of up to 10% in the first year and 1 or 2% later on. Encashment could also trigger exactly the tax charges the investor was seeking to avoid, particularly if the investor and spouse are higher-rate taxpayers.

09 April 2008 © Moneyextra.com

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