Investment Tax
Investment Tax efficiency is essential. Imagine an investment fund of £100,000 that grows at 8% per year. If just 20% tax were taken from that, the returns would be reduced down to 6.4%. Over 20 years the compounding effect of that would mean a loss of £37,364 in investment tax. There is no need to pay unnecessary tax on Investments.
An ISA should be your first port of call.
After that collectives should be the next choice, as the table below will show.
There are other tips to consider. For example an investor who places capital into an Offshore (not Onshore) bond will receive virtually tax-free roll up on their investment. Later some of the capital can be assigned to a non tax payer who then encashes the bond and the gain is assessed against the non taxpayer who of course uses their personal allowance and doesn’t pay any investment tax. This is commonly used to pass money to children particularly as they work as a student. There are many methods of saving investment tax so take careful advice.
What is a collective?
It is an investment such as a unit trust, OEIC, or investment trust that allows your capital to be spread across a wide range of stocks to minimise your risk and maximise return. We are simply comparing a collective to an investment bond here to show the tax implications of a widely sold product versus a product that isn’t widely sold. Collectives pay financial advisers 3% commission whereas investment bonds pay up to 8%.
| Investor Need | Single Premium Bond | Collectives |
| Wholly cash funds | YES | YES |
| No infill of tax returns (in respect of this investment) during course of investment (i.e. pre realisation) | YES | NO Unless completely non- income producing |
| Ability to extract funds during the course of the investment free of tax at that time | YES 5% available with no immediate tax at that time. Withdrawals in excess of this will be potentially subject to higher rate tax less 20% internal tax (UK bonds) or subject to 10%, basic and (if relevant) higher rate tax in respect of offshore bonds. Special rules if bond subject to offshore trust. | YES By using CGT annual exemption – also, taper relief operates to reduce the chargeable gains before applying the annual exemption. |
| Ability for non-taxpayers to avoid tax altogether up to available personal allowances and/or annual CGT exemption | NO Under offshore bond only up to unused personal allowance. No scope to use annual CGT exemption. There may also be non- reclaimable w/h tax.UK bonds – taxed internally at 20% with no reclaim possible. | YES Can use any unused personal allowance for income (distributed or accumulated). No reclaim possible in respect of 10% tax credit on UK dividends.Can use CGT annual exemption for capital gains.
Taper relief may operate to reduce the gain, possibly down to or below the annual CGT exemption. |
| Ability to pay less than the appropriate highest rate of tax for the particular investor on final encashment | YES But only under UK bond. Max tax is only 20% of the net gain making overall tax usually less than 40% – for example it would be 37% if tax on income and gains generated by the life fund were suffered at an average rate of 20%. | YES By using taper relief/annual CGT exemptionMaximum taper relief can extend the annual exemption and/or reduce tax rate for higher rate taxpayers to 28% on capital gains (18% for basic rate taxpayers). |
| Ability for investor to switch underlying funds without triggering a tax charge | YES | NO Only by “internal investment management” (e.g. in a fund of funds) and no disposal of units/shares takes place by the investor. Where the investor has shares or units in sub-funds of an ´umbrella´ fund then in most cases disposals of those shares or units or switching from one to another will trigger a disposal for CGT. |
| Ability to hold/transfer into trust for IHT planning | YES Care gains assessed on UK resident settlor and, in tax years beginning after that in which the settlor dies, on UK resident trustees. Possible deferment for o/s trustees but care as any amounts received subsequently by UK beneficiaries will be subject to tax as Case VI income under s740 to the extent of past gains not assessed on settlor – no basic rate credit for UK bond gains. | YES Care: income tax/CGT/self assessment issues for trustees and possibly settlor/ beneficiaries. Particular complications can arise for the trustees of interest in possession trusts where income is not distributed e.g. where the units owned are accumulation units. |
| Ability to reduce gains by reference to a period of non-residence | YES Only if offshore bond. | NO But “pre-return” re-basing of gains possible. |
| Ability to use annual CGT exemption | NO | YES |
| Ability to use taper relief | NO | YES |
| Ability for investor to use indexation relief | NO For UK bonds only life office entitled to indexation – means that less internal tax is paid or reserved for. | YES Available for gains up to 5.4.98 only. |
| Fund access | Restricted in an onshore bond. | Full access to pure funds. |
| Can trustees of existing trusts invest in these investments i.e. in a bond or mutual fund? | YES | YES |
| Can a company invest? | YES Tax detrimental if bond a UK bond | YES But no annual CGT exemption, and no taper relief available. Currently indexation will still apply. |
| Ability to encash free of UK tax when non-UK resident | YES If not resident in the UK at any time during the tax year of encashment -ESC – B53. | YES 5 year “non-resident” test. |
| Ability for investor to offset other capital losses against taxable gains | NO | YES |
| All capital gains “wiped out” on death of investor | NO Death of investor may trigger chargeable event. This could be deferred if other lives assured survive the investor. | YES Revaluation of mutual fund on death. No CGT due. |
Find out why so many people choose Worldwide Financial Planning as their Investment adviser by calling 0800 0112825 or complete the enquiry form in confidence.
What does that mean to you?
You can be rest assured our investment advisers are highly trained to maximise the best investment returns whilst minimising the risk to your capital.
‘Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made’
‘All information is based on our understanding of current tax practices, which are subject to change’
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