Using a VCT to surrender a bond tax-efficiently

The Challenge

An investment bond is a single-premium life insurance policy often used by clients to earn a tax-efficient income or to pass on wealth. The holder of the bond will only pay tax when a ‘chargeable event’ occurs, such as surrendering the bond, maturity of the policy, or withdrawals in excess of the 5% annual allowance. In situations where clients will create a chargeable event, they need to be advised about the potential tax implications.

Asher has an investment bond with a current value of £120,000 which he would like to surrender, as the bond no longer meets his financial planning objectives. However, his financial adviser has told him that surrendering the bond would create a chargeable event resulting in a £9,000 income tax bill.

The Solution

Asher’s financial adviser explains that he could surrender the bond and use a Venture Capital Trust (VCT) to offset the income tax created. After discussing the benefits and the risks of investing in a VCT, Asher’s adviser explains that an investment of £30,000 in the Triple Point Venture VCT would entitle Asher to claim income tax relief of 30% on his investment, offsetting his £9,000 income tax liability in full, provided he holds his VCT shares for the minimum five-year holding period.

Also, as most VCTs will target dividends, Asher can expect to receive an annual tax-free income from his investment. VCT dividends are completely tax-free and there’s no HMRC requirement to declare them on tax returns. What’s more, by surrendering the bond and using £30,000 of it to invest in a VCT, this has freed up £90,000 worth of capital which he is now able to reallocate into planning, which will better suit his needs.

Investor’s capital is at risk.
For simplicity, this illustration does not take into account investment growth or charges for the investment. It is based on the current tax rules and personal allowances as at September 2024, which could be subject to change and depend on individual circumstances. Tax reliefs depend on a VCT maintaining its qualifying status and target returns may not be guaranteed.

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