As the tax landscape continues to shift, advisers and paraplanners are being forced to rethink the default wrappers we use to house client wealth.
For many years, the general investment account (GIA) was the undisputed king of unwrapped investments. With generous capital gains tax (CGT) exemptions and dividend allowances, the GIA was the default overflow vehicle once Isas and pensions were maxed out.
But this environment has changed dramatically. With the dividend allowance slashed to £500 and the CGT exemption squeezed to £3,000, the administrative burden of managing a GIA has skyrocketed.
Clients with modest GIA portfolios are now dragged into self-assessment, and the annual ‘Bed and Isa’ exercise requires forensic precision to avoid unexpected tax bills.
An investment bond is a non-income producing asset. It operates on a ‘tax-deferred’ basis
As members of the PFS Paraplanning Panel, we are seeing a distinct shift in strategy. It is time to talk about the renaissance of the investment bond.
The GIA vs the bond: a question of administration
When comparing a GIA to an investment bond, the conversation often defaults to tax rates: CGT versus income tax. However, in practice, the real differentiator is administration and control.
A GIA operates on a ‘tax-as-you-go’ environment. Every dividend, interest payment and fund switch is a potential taxable event that must be tracked and reported.
Conversely, an investment bond is a non-income producing asset. It operates on a ‘tax-deferred’ basis. Clients can switch underlying funds without triggering a CGT event, and they can draw up to 5% of their original premium each year without immediate tax consequences.
If you are placing money into a trust, the bond is almost always the wrapper of choice
For clients wanting a predictable, admin-free income stream to supplement pensions, the bond offers a level of simplicity that the modern GIA simply cannot match.
While investment bond gains are subject to income tax rather than CGT, careful planning such as utilising top-slicing relief or timing encashments for when the client drops a tax band in retirement can heavily mitigate or even eliminate this liability.
The perfect marriage: bonds and trusts
Where the investment bond truly flexes its muscles is in estate planning. If you are placing money into a trust, the bond is almost always the wrapper of choice.
Consider placing a GIA into a discretionary trust. Trusts are subject to punitive tax rates – up to 45% on income and 39.35% on dividends. Furthermore, trustees face the ongoing nightmare of completing annual trust tax returns, tracking dividend income and managing the trust’s own minuscule CGT exemption.
This synergy makes bonds the foundational engine for discounted gift trusts (DGTs) and loan trusts
Because an investment bond does not produce income, placing it inside a discretionary trust bypasses this administrative headache. There is no income to report or annual trust tax return required until a chargeable event occurs.
This synergy makes bonds the foundational engine for discounted gift trusts (DGTs) and loan trusts.
They allow clients to move capital outside of their estate for IHT purposes while retaining a fixed, tax-deferred 5% income stream (in the case of a DGT) or access to their original capital (in the case of a loan trust), all without creating an annual reporting requirement for the trustees.
The assignment superpower
Finally, we must mention bonds’ ultimate planning superpower: assignment.
Unlike a GIA, which must be sold (triggering CGT) to transfer cash, an investment bond is divided into multiple segments. These segments can be assigned to another individual without triggering a chargeable event.
When the child encashes the segments, the gain is assessed against their income tax position
This is incredibly powerful for intergenerational wealth transfer. A higher-rate taxpayer can assign segments to an adult child (perhaps to fund university fees or a house deposit). When the child encashes the segments, the gain is assessed against their income tax position.
If the child is a non-taxpayer, they can utilise their personal allowance of £12,570, the starting rate for savings of £5,000 and the £1,000 personal savings allowance to potentially extract up to £18,570 of gains tax-free.
Mark Tan is a panel member of the PFS Paraplanners
