Bonds are a kind of loan that governments or companies use to raise money, so they are a financial means of corporate lending. They’re essentially a corporate I-O-U, but on a more formal and contracted basis. If you buy a bond, you are technically lending money to whoever issued you with the bond and they are obliged to repay you interest, or the value of the bond at a later date.
There can be some confusing terminology around bonds, so we’ve broken it all down for you:
There are important tax implications of bond profits that you need to be aware of:
When you have a bond in the UK, you may be charged Income Tax when you withdraw from it. But any profits that you make within an investment bond are taxed at 20% and paid out of the bond directly.
There is also a withdrawal allowance of up to 5% each year, which you’re allowed to carry forward if you don’t use it. You can do this without being liable to pay any extra tax.
This means that as a higher rate or additional rate taxpayer (paying 40% or 45% Income Tax), bonds can be a good investment to minimise your Income Tax bill. However, you will be charged the outstanding tax bill on when the bond matures.
Speak to one of our expert financial advisors for information based on your income, tax brackets and potential earnings from bonds to get bespoke advice on purchasing bonds.
Unfortunately, the company from whom you purchased the bond are only obligated to repay the value of the bond at the maturity date. For more information, contact our experts today.