Investment Bonds

[timsk]

Any Ideas Folks?

My wonderful Mother-In-Law sadly died last year and her husband (still going strong) and three children have decided to set up a trust in which to park the proceeds of her estate. The money is for my Father-In-Law - should he need it in his old age and, if he doesn't, then it will provide an investment to be administered by the trustees, namely those mentioned above. The idea they've come up with is to stick all of the estate into an 'Investment Bond'. I suggested they gave me the money to trade with, but their response was not positive. In fact, it bordered on the offensive, well I thought so anyway.

Moving on, investment bonds are a life assurance industry product that involve 4-5 asset classes: 1. Cash. 2. Fixed Interest. 3. Property. 4. Shares. and (sometimes) 5. Commodities. If you're a low risk investor you opt for the first two and if you're a high rolling gambler you go for options 3-5. The (only) real advantage of this investment seems to me to be that there is no capital gains tax or income tax liable. The trustees can withdraw 5% of the initial sum invested for each year up to 20 years - i.e. the total initial sum - without paying a penny in tax. That's the good news. The bad news is that the bond may not make any money and even if it does, it may get frittered away in charges to pay for the fund manager's pad in the Caribbean.

Has anyone got any knowledge and / or experience of these things and provide any pointers? Any thoughts and comments would be gratefully received.
Thanks in advance,
Tim.

 

[reddragon]

Hi,
As far as investment bonds go my recent experience has been with
using a Discount Gift Bond (DGB), for Inheritance Tax planning.
My father died in 2004, and whilst sorting his estate both our solicitor and
accountant advised my mother that a large sum in IHT would be due on her
estate, after her final days.
They recommended that she invested any
cash into a DGB, the advantages being:
Being able to withdraw a tax free income up to 5% of the initial sum
invested.
Immediately that the monies were invested, a percentage of this sum, in my
mother's case being 26%, would be outside any IHT calculation on her
estate - if she had been a few years younger/ in slightly better health, then
this %age could've been up to the max of 30%.
Also, any capital gains which were obtained whilst the money was
invested in the DGB, would not be taken into account when the IHT
on her estate would be calculated.
Furthermore, after the first 3 years since the original investment was
made, the rate at which IHT would be levied would be reduced year by year
until on the ending of the 7th year, from the initial investment date, all the
monies in the DGB would not be included in the deceaseds estate.
I look upon a DGB as a big ISA.
Now the downside:
By taking an income from the DGB, you must ensure that the interest
the money invested earns must be sufficient to cover this withdrawal,
i.e if you withdraw the full 5% then it must earn, at least, the same amount.
Also, the money can be invested in a various mix of Property/Corporate
Bond/Equity Funds in order to get the required return. HOWEVER, you
then come up against the bid/offer spread of the units in these funds, which
can be around 6/7%, i.e the initial sum invested needs to grow by approx
8% in order to overcome this bid/offer spread PLUS the 5% which is taken
as income, so the money invested would need to earn approx13% in it's
first year in order to stand still. If my maths is out, my apologies.
FINALLY I'D LIKE TO POINT OUT THAT WE ONLY INVESTED IN
A DGB AFTER THOROUGH CONSULTATION WITH OUR
ACCOUNTANT AND SOLICITOR - I STRONGLY RECOMEND THAT YOU DO THE SAME, BECAUSE EVERY PERSON'S SITUATION IS UNIQUE,
AND THAT THERE IS NO ONE SIZE FITS ALL.

 

[Benny Dorm]

The new Octopus Income Fund will provide a 3% gross income and will be outside one's estate after 2 years. Excellent for the elderly or for those in poor health wanting to pass over part of their estate to their beneficiaries.