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5% withdrawals can be taken each policy year without an immediate tax charge. Any unused allowance can be carried forward to future years.

Bonds can provide an 'income' without any impact on an investor's personal allowance, high income child benefit tax charge and/or personal savings allowance, as long as it is kept within the 5% allowance.

If the investor takes more than the 5% allowance that they have built up, tax may be payable. This will depend on the tax position of the investor and whether the bond is onshore or offshore.

There's no need for annual tax returns, unless there's been a chargeable event (such as withdrawing more than the 5% annual allowance) resulting in a chargeable gain. This is because investment bonds are non-income producing assets.

Gains from offshore bonds can be set against the savings rate band of £5,000 at 0% and the personal savings allowance, £1,000 for basic rate and £500 for higher rate taxpayers. 

Higher rate tax payers can use their £500 personal savings allowance against onshore bond gains.

Income from an OEIC/UT will be taxable, whether taken or reinvested.

Non-equity funds (which hold 60% or more in cash or fixed interest) pay income as an interest distribution. Investors can use the savings rate band and/or personal savings allowance against this income where available. Interest is then taxed at 20%, 40% and 45% (basic, higher, additional rate taxpayers).

Equity funds (which hold less than 60% in cash or fixed interest) pay income as a gross dividend. Investors have a £500 dividend allowance (£1,000 2023/24) that they can set against this income . Dividends are taxed at 8.75%, 33.75% and 39.35% (basic, higher, additional rate taxpayers) for amounts in excess of this. 

Income, whether interest or dividend, will be included in the assessment of an investor's personal allowance and high income child benefit tax charge.

Selling shares/units to top up income is a disposal for capital gains tax. Gains may be covered by the annual CGT allowance. The rate of CGT payable will depend on the allowances and reliefs available to the investor and on their income tax position.

Where OEICs/UTs produce income, this will normally need to be reported each year to HMRC, even if accumulation units or shares are chosen. Capital gains may also need to be reported when a disposal takes place.

When an investor cashes in their bond, they may pay income tax. The rate will depend on the income tax position of the bond owner and whether the bond is onshore or offshore.

Switching funds in an investment bond can take place with no tax implications for the investor.

When an investor sells shares/units this is a disposal for capital gains tax, although any gains may be covered by the annual CGT allowance. The rate of CGT paid will depend on the investor's income tax position.

Accumulation shares/units - a reduction in the disposal proceeds is allowed for the reinvested income.

Income units where the income was reinvested - no deduction from the disposal proceeds is allowed. As each amount of reinvested income purchased further shares/units, this is allowed for in the cost of shares.

Losses on disposals can be offset against other capital gains.

Selling a unit trust or OEIC and repurchasing another is a disposal for CGT with possible tax and reporting requirements.

Individuals may be able to alter their level of income to reduce or avoid tax on surrender of the bond. For example, they could reduce pension income taken by drawdown.

Individuals may be able to make a pension contribution which could be used with top slicing relief to reduce tax payable on any gain.

Gifting the bond (by assigning it) to a lower/non taxpayer such as a spouse or child in further education won't create any liability to CGT or income tax, and it can reduce or avoid the tax that would otherwise be payable by the investor.

Gifting the bond (assigning into trust or to an individual) will be a transfer of value for IHT purposes, although this may be covered, partially or fully, by an exemption.

Having multiple lives assured can help to avoid any chargeable event upon death of the bond owner.

If a chargeable gain arises in a tax year in which the investor is non-UK resident then there will be no liability to UK income tax. There may be a tax liability in their country of residence. Anti-avoidance legislation taxes the chargeable gain if the non-resident returns to the UK within five years.

Time apportionment relief applies to all offshore bonds and those onshore bonds taken out or assigned since 6 April 2013. It reduces the tax liability on chargeable gains for individuals who've been non-UK resident for any period of their investment.

Investment bonds are not generally included as capital within the means test for local authority residential care funding. However, withdrawals may be treated as income for this purpose.

Individuals may be able to alter their level of income to reduce the tax rate payable on a capital gain. For example, they could reduce pension income taken by drawdown.

Individuals may be able to make a pension contribution which could reduce the rate at which they pay CGT.

Gifting the OEIC/UT to another individual or into trust (by stock transfer) will be a disposal for CGT purposes. This may be covered by the annual CGT allowance. Gift hold-over relief may also be available if the gift is to a relevant property trust. Gifts between spouses/civil partners do not give rise to a gain or a loss.

Transferring the OEIC/UT to another individual or into trust (by stock transfer) will be a transfer of value for IHT purposes, although this may be covered, partially or fully, by an exemption.

No CGT is payable on death.

Investors who are non UK resident under the statutory residence test won't be liable to UK CGT on disposal of their OEIC/UT. However, anti-avoidance legislation means they'll need to remain non-UK resident for five complete tax years for the gain to remain exempt from CGT.

OEICs/UTs are included within an individual's assessment for local authority residential care funding.

Onshore bond funds' internal taxation is extremely complex. In general terms it can be summarised as follows:

• Interest and rental income are subject to corporation tax at 20%. There is no further tax to pay on dividends although foreign dividends may have paid withholding tax.
• Corporation tax is payable on capital gains at 20%. Indexation allowance is available for periods before 1.1.2018 to reduce the gain.
• Investors are given a non-reclaimable 20% tax credit to reflect the fund's taxation.

Offshore bond funds are typically located in jurisdictions which impose no tax upon investment funds, such as Ireland, the Channel Islands and the Isle of Man.

• Interest, dividends and rental income are tax free. Foreign income may have paid withholding tax. This may be able to be reclaimed.
• No corporation tax is payable on capital gains.

OEICs/UTs are only subject to tax within the fund on income received, so:

• Interest and rental income are subject to corporation tax at 20%. There's no further tax to pay on dividends although foreign dividends may have paid withholding tax.
• No corporation tax is payable on capital gains within the fund.