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Investment bonds may be recommended in a number
of situations:
If you are a higher rate taxpayer seeking an extra income, an investment
bond may be suggested, so you can take advantage of the rule that allows 5
per cent annual withdrawals, for twenty years, without any immediate tax
liability.
If you are retired and want a supplementary income, but you are in danger of
falling into the age allowance ?trap.? This is the situation where the extra
personal tax allowance you receive when you are 65 (?7,280 for 2006/07) is
reduced if your income exceeds a certain level (?20,100 for 2006/07). Annual
5 per cent withdrawals from investment bonds will not count towards your
income, so it will not affect your age allowance. However, before you cash
in your bond you will need to consider how your age allowance might be
affected in that year.
If you are an active investor with a large investment portfolio and you are
already utilising your annual capital gains tax allowance. Using an
investment bond to manage your money will mean you will not liable for
capital gains tax when you make switches between funds.
If you are trying to shelter capital from inheritance tax through a
discounted gift trust or loan trust. Life insurance companies often sell
packaged products where these trusts are linked to investment bonds. The
advantage of using an investment bond is that the investment income in
trusts will generally be taxed at 40 per cent, but when it is accumulated
within a bond it is only taxed at 20 per cent.
If you are an investor who is likely to need long term care. Life insurance
policies will not normally be counted as part of your means when your
eligibility for local authority funding is assessed.
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