Taxation matters

Different investments have different tax treatment

If you or your partner is a non-taxpayer, make sure that you are not paying unnecessary tax on bank and savings accounts. Avoid the automatic 20 per cent tax deduction on interest by completing form R85 from your bank or product provider or reclaim it using form R40 from HM Revenue & Customs.

Individual Savings Accounts (ISAs)
You pay no personal income tax or capital gains tax on any growth in an ISA, or when you take your money out. You can save up to £11,280 per person in the 2012/13 tax year in an ISA.
If you invest in a Stocks and Shares ISA, any dividends you receive are paid net, with a 10 per cent tax credit. There is no further tax liability.

The impact of taxation (and any tax reliefs) depends on individual circumstances. Information about tax rules is based upon our current understanding and is liable to change in the future.

National Savings and Investments
You can shelter money in a tax-efficient way within this government-backed savings institution.

Unit Trusts and Open Ended Investment Companies (OEICs)
With a Unit Trust or OEIC your money is pooled with other investor’s money and can be invested in a range of sectors and assets such as stocks and shares, bonds or property.

Dividend income from OEICS and unit trusts invested in shares
If your fund is invested in shares then any dividend income that is paid to you (or accumulated within the fund if it is reinvested) carries a 10 per cent tax credit. If you are a basic rate or non taxpayer, there is no further income tax liability. Higher rate taxpayers have a total liability of 32.5 per cent on dividend income and the tax credit reduces this to 22.5 per cent, while the additional rate taxpayers have a total liability of 42.5 per cent reduced to 32.5 per cent after tax credit is applied.

Capital gains tax
No capital gains tax is paid on the growth in your money from the investments held within the fund, but when you sell, you may have to pay capital gains tax.

Bear in mind that you have a personal capital gains tax allowance that can help you limit any potential tax liability. After 23 June 2010 the rate of tax that applies on any gain over your allowance is either 18 per cent or 28 per cent depending on your taxable income.

Accumulated income
Accumulated income is interest or dividend payments which are not taken but instead reinvested into your fund. Even though they are reinvested they still count as income and are subject to the same tax rules as for dividend income and interest.

Onshore investment bonds
Investment bonds have a different tax treatment from other investments. This can lead to some valuable tax planning opportunities for individuals. There is no personal liability to capital gains tax or basic rate income tax on proceeds from your bonds. This is because the fund itself is subject to tax, equivalent to basic rate tax.

You can withdraw up to 5 per cent each year of the amount you have paid into your bond without paying any immediate tax on it. This allowance is cumulative so any unused part of this 5 per cent limit can be carried forward to future years (although the total cannot be greater than 100 per cent of the amount paid in).

If you are a higher or additional rate taxpayer now but know that you will become a basic rate taxpayer later (perhaps when you retire for example) then you might consider deferring any withdrawal from the bond (in excess of the accumulated 5 per cent allowances) until that time. If you do this, you will not need to pay tax on any gains from your bond.

Onshore investment bond considerations
Certain events during the lifetime of your bond may trigger a potential income tax liability:

  • Death
  • Some transfers of legal ownership of part or all of the bond
  • On the maturity of the bond (except whole of life policies)

On full or final cashing in of your bond
If you withdraw more than the cumulative 5 per cent annual allowance, a tax liability is calculated on the amount withdrawn above the 5 per cent.

If you are a higher or additional rate taxpayer or the profit (gain) from your bond takes you into a higher or additional rate tax position as a result of any of the above events then you may have an income tax liability.

As you are presumed to have paid basic rate tax, the amount you would be liable for is the difference between the basic rate and higher or additional rate tax. The events may also affect your eligibility for certain tax credits.

Life assurance bonds held by UK corporate bonds fall under different legislation. Corporate investors cannot withdraw 5 per cent of their investment and defer the tax on this until the bond ends.

Offshore investment bonds
Offshore investment bonds are similar to UK investment bonds above but there is one main difference.

With an onshore bond tax is payable on gains made by the underlying investment, whereas with an offshore bond no income or capital gains tax is payable on the underlying investment. However, there may be an element of withholding tax that cannot be recovered.

The lack of tax on the underlying investment means that potentially it can grow faster than one that is taxed. Note that tax may be payable on a chargeable event at a basic, higher or additional rate tax as appropriate.

Remember that the value of your fund for both onshore and offshore bonds can fluctuate and you may not get back your original investment.

Offshore is a common term that is used to describe a range of locations where companies can offer customers growth on their funds that is largely free from tax. This includes “true offshore” locations such as the Channel Islands and Isle of Man, and other locations such as Dublin. Tax treatment can vary from one type of investment to another and from one market to another.

UK shares and taxation
If you own shares directly in a company you may be liable to tax.

Dividends
Any income (dividends) you receive from your shares carries a 10 per cent tax credit. Higher rate taxpayers have a total liability of 32.5 per cent on dividend income and the tax credit reduces this to 22.5 per cent, while the 50 per cent additional rate taxpayers have a total liability of 42.5 per cent reduced to 32.5 per cent after tax credit is applied.

Sales of shares
When you sell shares you may be liable to capital gains tax on any gains you may make. You have a yearly allowance, above which any gains are liable to 18 per cent tax. Special rules apply to working out your gains or losses.

Make the most of your personal income allowances
If you have a non-earning spouse, or civil partner, you can switch income-earning investments to help your tax bill. Everyone up to age 65 has a personal allowance of £8,105 in the 2012/13 tax year, rising to £10,500 between the ages of 65 and 74 and £10,660 at 75 and over. This means you can earn this amount without paying tax.

Use capital gains tax allowances wisely
Everyone can make up to a certain amount of profit each year from selling an investment or property without paying tax. Think about switching investments to a spouse’s or registered civil partner’s name to take advantage of both of your allowances.

The value of investments and the income from them can go down and up, and you may not get back as much as you paid in. Tax benefits and liabilities depend on individual circumstances and may change in the future.

Past performance is not a guide to the future.

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