In four days time the investment bond might start its slow lingering death.
As of the new tax year the chancellor has reduced the rate of Capital Gains Tax for everyone down to 18%. This means that unit trusts and OEICs which are subject to this tax now look more attractive than investment bonds which are subject to income tax.
It has long been the case that a portfolio of ISAs and Unit Trusts is more flexible and easier to manage for investors. But where the tax treatment has been better for ISAs than investment bonds it hasn't been so clear cut for unit trusts versus investment bonds.
Investment bonds have basic rate tax of 20% deducted at source on gains made within the fund. Unit trusts and OEICs by contrast have 20% income tax deducted at source on rent or interest payments but only 10% deducted on share dividends. On surrender a unit trust now has only 18% deducted from the gain and this is after the annual allowance which covers most people's gains.
Given the flexibility and tax efficiency of an ISA/Unit Trust portfolio versus an Investment Bond, I would argue that investment bonds have only been as popular as they have been, due to the high levels of commission paid to advisers by the providers. This business strategy of buying business has worked wonders with Investment Bonds sales far exceeding their practical use and appropriateness for investors.
So should you switch your bond investments to Unit Trusts/ISAs? Well the answer is, it depends. Any tax benefit may be wiped out by initial charges and you would need to consider careful your taxation position now and in the future. But what is certain is that this change should prompt more appropriate advice to clients and the result, in the long-term, should be the death of the bond.