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Where do you want your client’s (investment) recovery to happen?

5 minutes read
Last updated on 25th June 2020

When investing for the longer term it’s almost inevitable that you will experience a market downturn at some point and last month I wrote about tax points to remember if your client’s investment have fallen in value. But investment values can go up as well as down and some of the biggest market rises have come off the back of large market falls. 

If markets were to bounce back tomorrow would your client’s money be in the right tax wrapper, or even the right hands to make the most of it?

Here’s a quick look at some of the tax considerations to help you check your clients are in the right place for a  market recovery.

Individual Savings Accounts

Any income or gains within an ISA are free of tax and there’s no further tax on the investor on a personal level.

The ISA subscription limit for the current tax year is £20,000 for an adult or £9,000 for children under age 18. However although there are restrictions on the amount you can subscribe, the growth on your ISA doesn’t count towards the limit.

If you normally bed and ISA your OEICs at tax year end would it be better done now before any potential recovery?

If you want to hold on to your assets then it makes sense to ensure future returns are tax free but if IHT is an issue then do you want this tax free growth rolling up within your estate only to be subjected to 40% IHT on death?

Unless BPR ISAs are appropriate for your client, ISAs are not “tax free” for those with an IHT liability and consideration should be given to encashing and making outright gifts or gifts into trust. One benefit of falling fund values is that the value of a gifted investment will result in a smaller gift being made from an IHT perspective and the future growth will accrue outside your estate when markets recover.

Pensions

The pension is another example where income and gains within the investment are tax free but the pension also has the benefit of tax relief and IHT  efficiency.  

Unlike an ISA, a pension provides tax relief on the contribution made. While 75% of the benefits drawn are subject to income tax in the hands of the member, this still means a basic rate taxpayer receives a 6.25% risk free return (£80 in £85 out) without taking into account any growth. If your pension does grow, your tax relief grows with it so it’s a good place to be if markets pick up.

For those with IHT issues a further benefit of pensions is that they are normally not included in your estate for IHT and where contributions are made to your own pension, while in good health, there is no transfer of value i.e. no gift or “7 year clock” and you still have access to the assets.

If you’ve maximised your own pension allowances you can still make third party pension contributions for family, and remember even where someone has no relevant earnings contributions can still be made up to £3,600 gross and receive tax relief.

Should you kick start your recovery with a 25% boost from tax relief?

OEICs

OEICs pay no tax on dividends or capital gains from the underlying investments but the investor is liable to income tax on any income generated and potentially CGT on encashment of units. 

Capital gains within the annual exempt amount (currently £12,300) are free of tax. Gains in basic rate are taxed at a relatively low 10%, while those in higher or additional rate subject to 20% tax.

Where an individual is able to make use of their dividend nil rate against dividend income,  savings allowances against interest distributions, and can crystallise gains within the Annual Exempt Amount, OEICs offer a tax efficient investment strategy.

If this isn’t the case it’s maybe time to think about a different investment wrapper. Remember if losses are crystallised to move tax wrapper these can be claimed as loss relief and set off against future gains.

You may consider making a gift of the OEIC itself.  

Although changing the ownership of an OEIC is normally a disposal for CGT, where the gift is made between spouses it is deemed to be on a no gain/no loss basis so there is no tax to pay at the time. This could be beneficial if you have a spouse who is not making use of their allowances or annual exempt amount.

For IHT planning, as well as making an outright gift of an OEIC, you can also place them in trust. The growth is outside your estate from day 1, and where the trust is discretionary, holdover relief may be available to defer any capital gain until a later disposal by the trustees or beneficiary.

Onshore Bonds

UK Life funds pay no tax on dividends generated by the underlying investments. Corporation tax is payable on other income and capital gains.

As investment bonds don’t produce income they are useful tax planning tools for investors who would otherwise pay a high rate of tax on income generated by their investments.  

The only taxation suffered by the investor is when a chargeable gain arises. The policyholder receives a 20% tax credit to offset against tax due so basic rate taxpayers have no further tax to pay and where the gain takes you into a higher tax bracket, top slicing relief is  available which can help mitigate higher or additional rate tax.

Bonds can also be gifted.  Assignment of a bond to another individual or into a trust by way of gift is not a chargeable event so there is no immediate tax on gains. Being non-income producing assets, bonds can also be tax efficient, and low maintenance, when held in trust as segments can be assigned out to beneficiaries, who are then assessed on any gains based on their own personal tax position.

Offshore Bonds

Offshore bonds grow in a virtually tax free environment which means all else being equal e.g. charges, an offshore bond should grow faster than the same investment held within an onshore bond or OEIC.

Chargeable gains within your personal allowance (£12,500), starting rate for savings (£5,000) or personal savings allowance (£1000 or £500) will suffer no tax. This means an individual with no other income, can crystallise gains  up to £18,500 free of tax.

Offshore bonds are particularly useful for trust planning where the beneficiaries are minor grandchildren as chargeable gains within a bare trust are assessed on the beneficiaries. If it’s a discretionary trust, perhaps to maintain control of funds beyond 18,  it’s also possible for segments to be assigned to beneficiaries to take advantage of their tax position (or segments appointed if beneficiaries are minors).

Summary

While a particular investment may have been right  for a client when it was taken out, their tax position and objectives may have changed. Tax rules also change and while tax efficiency doesn’t turn a bad investment into a good one, with investment values having recently suffered a blow, now might be the ideal time to review whether your client’s investments are in the best place to maximise the net returns on their investments going forward.

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