Tax On Investment Bonds

Investment bonds are also known as insurance bonds. They are issued by life insurance companies and act as long term investment options. The object of investment bonds is to allow investors to put their money into a variety of funds which are managed by a fund manager. Investment bonds are usually held for a minimum of ten years. However, the investor can draw money out of the investment at any time. Some investment bonds can be drawn upon only a certain number of times a year. Depending on the bond, it might be drawn from monthly, quarterly, or yearly.

Investment bonds are tax paid investments. This means that the investor pays tax on the investment's earnings directly to the fund manager. The percentage that investors pay on such bonds is 30%. If the investment bond is held in term for the full ten years, then at the end of term no additional tax will need to be paid and the investment earnings will not have to be reported on your end of the year taxes. Investment bonds are particularly beneficial to investors who are already paying a high rate of tax because it saves them money on their year-end taxes over the course of ten years.

Basic-rate taxpayers will have no more tax to pay on their investment unless they are pushed into a higher tax bracket. If you are moved into a higher rate taxpayer bracket by the time you cash out the investment, you will have additional taxes to pay. More tax might have to be paid in the event the investor dies before the end of the investment term. Investors who withdraw additional money from the investment bond before the end of its ten year term may also have to pay taxes. If the investor withdraws less than 5% of the total amount invested, there will be no additional tax, as long as they are a basic rate taxpayer. If they are moved into a higher rate, some taxes may have to be paid. But if the investor withdraws more than 5% of the total invested amount, those withdrawals will be subject to taxation.