Is it all about the wrapping?

We are often asked whether a bond or a collective is the right choice for a particular client. This isn’t a new dilemma however; certain legislative changes have changed the comparisons slightly.

Before looking at the products it is important to consider the client objective(s). Tax planning will often be a key consideration but there may be occasions when the position is less important. For example, bonds are often the primary choice for inheritance tax planning. Bonds are considered non-income producing and they help trustees limit the reporting they are required to do. Bonds also offer flexibility by the ease of assigning all or part of them. The trust solutions offered by insurers are also generally packaged around a bond so there is no decision about the product if the IHT solution meets the client objective.

If the objective can be achieved equally well by a number of products then tax might be a differentiator and therefore, the new considerations into the dilemma are:

  1. CGT rate reduction
  2. Personal savings allowance
  3. Dividend allowance

These changes at first glance may favour the unwrapped or collective (general) investment account. However, other products might offer other benefits which are more important to the individual than tax. Below are some examples of projected returns on 3 products over a 10 year period. These projections do not include product charges but purely look to review the taxation on the respective products. To provide a net return position, tax suffered during the term has been deducted from the products:

Basic rate tax payer:

As you would expect, the offshore bond provides the best gross return. The absence of life fund taxation and generally tax free income (with the exception of some withholding tax) returns £48,024 after 10 years (a 48.02% increase). The collective, comes second in the gross return (47.58%). It suffers just a small amount of tax on interest distributions exceeding the personal savings allowance. Finally the onshore bond comes third (45.20%), the life fund taxation amounts to £2,379 over the 10 years.

This then gets turned on its head when you look at the net return on surrender. The onshore bond jumps to first place, with no further tax payable for a basic rate taxpayer (assuming top slicing relief keeps the gain under the higher rate threshold). The collective maintains second place, with the CGT annual exemption ensuring a smaller amount of the gain is taxable at the lower rate of 10%. Then in third place the net return of the offshore bond, which has now had a 20% tax charge – basic rate.

There are some planning points here though as the surrender of the products in one go is rarely the best way to go:

  1. The collective could be cashed in over a number of years to make best use of the CGT annual exemption
  2. Part of the collective could have been transferred to a spouse to make use of two CGT annual exemptions
  3. The collective could have been switched regularly again to realise gains annually, avoiding one big gain on surrender
  4. The offshore bond could be assigned to a non-tax paying spouse to utilise personal allowance, starting or savings rate of tax
  5. The investments may have been established with the intention of moving some or all of the investment into an appropriate trust solution at a later date. The question of tax on surrender by the original owner then doesn’t arise. Instead, it becomes a longer-term generation planning exercise with the potential to use funds in the future on behalf of the next generation

This list is not exhaustive but gives an idea of some of the action that could be taken to reduce the impact of tax when an investment comes to an end.

If we compare this to a higher rate tax payer during the term but a basic rate on surrender (either by reduced earnings or assignment to spouse) the first placed product changes again:


No change in the gross return winner, the offshore bond. However, much more tax has been paid on the collective during the term with 40% payable on the interest earned over £500 personal savings allowance putting it into third place. The onshore bond doesn’t change as it is not influenced by the tax rate of the investor until a chargeable event occurs.
On surrender, a basic rate taxpayer pays no further tax on the onshore bond, 20% on the offshore and 10% on the collective after annual exemption. The net positioning is therefore the same but the collective has returned a lower net return than in the first example.

Other considerations

As mentioned above, tax is one consideration, there are many more. Some are detailed in the table below:

  • Flexibility for succession/trust planning
  • Time apportionment and top slicing reliefs
  • No CGT on switching
  • Non-income producing so no self-assessment unless chargeable event


  Collective Offshore bond Onshore bond
  • CGT rate of 10/20%
  • Produces income so utilises new dividend and personal savings allowances
  • Annual exemption available for capital gains


  • Tax free growth* (Gross roll-up)
  • Flexibility for succession/trust planning
  • Portability between jurisdictions
  • Time apportionment and top slicing reliefs
  • Gain can utilise personal allowance and starting rate for savings
  • No CGT on switching
  • Non-income producing so no self-assessment unless chargeable event
  • Flexibility for succession/trust planning
  • Time apportionment and top slicing reliefs
  • No CGT on switching
  • Non-income producing so no self-assessment unless chargeable event
  • Increased administration/ potential for self-assessment on income
  • Transfer of ownership is disposal for CGT purposes (exempt between spouses)
  • Lack of flexibility in succession/trust planning
  • Highest rates of tax applied when held by discretionary trusts
  • Potential CGT on fund switching
  • No tax treated as paid on surrender
  • Can reduce net return if no advice taken
  • Charges can be higher particularly where the investment amount is small
  • Life fund taxation can reduce gross return
  • Non-tax payer can’t reclaim tax paid
  • Gain can’t utilise starting rate for savings or personal allowance

* with the exception of some withholding taxes


The table above is not exhaustive but it does show that each product has its merits. As has always been the case, a number of products to best use the allowances available to your client is the best option.
The new allowances and lower CGT rates provides value in the collective option but this must be weighed up with any additional costs incurred because of the administration burdens such a product can bring.
The offshore bond can provide the best gross returns and with good exit planning can provide the best client outcome. However, smaller investments for shorter terms may struggle to absorb the charges associated.

Onshore bonds can be a good middle ground particularly for basic rate tax payers as they offer the simplicity of the tax being paid at source with only a personal liability to higher or additional rate tax. These may not be appropriate for non-tax payers though as the life fund tax can’t be reclaimed.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual International's interpretation of the relevant law and is correct at the date shown on the title page. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual International cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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