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Income Bonds
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These bonds are designed to be attractive to investors who are looking for a fixed interest over a fixed period of time. Some are very simple and the life company will declare an interest payment of, say, 5% a year for five years, at the end of which time the investor would simply receive their original cash back.
Others are more complicated, where the return of the original capital depends on the ability of one or more major markets either to maintain their current levels or to show some growth level over the pre-determined period to assure full return of the investor's original capital.
A basic-rate taxpayer will have no liability to either income tax or capital gains tax. You are allowed to withdraw 5% a year tax-free from your bond irrespective of your tax rate. If, however, the investor is already a higher-rate taxpayer, or any income in excess of the 5% when received from the bond would make them a higher-rate taxpayer, the gain is "top-sliced" and the investor would pay a marginal rate of tax of only 17% on the gain. There will never be any liability to capital gains tax.
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