Isas
Isas are probably the simplest wrapper to understand. With Isas there is no income tax or CGT when income or funds are withdrawn, plus funds grow free of tax, making them a popular investment choice. However, on death, Isa funds will form part of the estate, potentially leaving only 60 per cent of the fund inheritable.
Unit trusts and Oeics
Income from unit trusts and Oeics remains taxable whether it is taken or reinvested, regardless of whether this is through investing in accumulation units or purchasing fresh units each time.
Any capital withdrawn will be a disposal for CGT, provided gains do not exceed the annual exemption (£11,100 in 2015/16). And of course, that is just the amount of gain that can be withdrawn tax-free. Withdrawals will also include a return of the original capital which is not taxed. These investments also form part of the estate, but withdrawing funds to meet income also reduces the potential IHT bill.
Offshore bonds
Investment bonds are unique in that income and gains are rolled up – gross in the case of offshore bonds – within the fund, and only become taxable when a withdrawal triggers a chargeable gain. Further, withdrawals of up to 5 per cent of the original capital can be taken without an immediate tax charge.
This ability to defer and control when income becomes taxable is a valuable tool for tax planning. Timing withdrawals to coincide with tax years when there is little or no other income can result in gains falling within the personal allowance and savings rate band, meaning no tax is payable. Again, only the investment growth is taxable, not the return of the original capital.
Another useful planning feature is the ability to assign the bond or segments without triggering a tax charge. The new owner then becomes assessable to future tax. And with offshore bond gains taxed as savings income, a non-taxpayer could have gains of up to £15,600 completely tax-free, thanks to the changes to the savings rate band from April.
Onshore bonds
Onshore bonds enjoy many of the same planning freedoms as offshore bonds. But the key difference is that the onshore bond fund pays UK corporation tax on capital gains and interest, with a non-reclaimable 20 per cent credit given on surrender for the tax paid within the fund. As a result, onshore bonds sit on top of all other income in the order of taxation and non-taxpayers can not benefit from the additional £5,000 tax-free allowance.
Devising a combined income solution
While this mix of tax treatments can be confusing for investors, it offers real tax planning opportunities. Matching the income characteristics from each wrapper to the available allowances and preserving the capital for future generations is where those opportunities lie. Of course, as we all know, tax rules may change in the future, and investment growth is not guaranteed.
