Investment and tax
If you have investments, you may have tax to pay on them. Read our guide below and contact a financial adviser if you'd like more detailed advice.
If you or your spouse/civil partner is a non-taxpayer, fill in an R85 form from your bank or product provider to make sure you're not paying the tax automatically deducted from bank or savings accounts.
If a non-taxpayer is charged tax on their other investments, it can usually be claimed back.
Personal Income Allowances
Everyone is allowed to receive a certain amount of money before they have to pay tax. If you have a non-earning spouse/civil partner, you can transfer investments to them to take advantage of their income allowance.
Capital Gains Tax Allowances
You can make up to a certain amount of profit every year from selling an investment or property without paying tax. Consider moving investments to your spouse/civil partner's name to take advantage of both your allowances.
You pay no tax on money held in a cash ISA account. Investors do not pay tax on any of the income they receive from ISA savings and investments. Nor do they pay any tax on capital gains arising on ISA investments.
In a stocks and shares ISA, you pay no capital gains tax on your investments. You can invest up to £15,000 in the Prudential ISA in the tax year 2014/2015 and up to £15,240 in the tax year 2015/2016. You can find a guide to the Prudential ISA here. The Prudential ISA is a stocks and shares ISA.
The Government will introduce legislation to allow an additional ISA allowance for spouses or civil partners when an ISA saver dies, equal to the value of that saver's ISAs.
Unit Trust and Open Ended Investment Companies (OEICs)
Higher and additional rate tax payers will have tax to pay on any dividends they receive. For a higher rate tax payer this is 25% of the amount received. Additional rate tax payers will have to pay a further 32.5% of the gross dividend.
Fixed interest funds
Tax of 20% is deducted from the income from these funds. A non-taxpayer can claim this back. A higher rate tax payer will have to pay another 20% tax.
An additional rate taxpayer will pay a further 25% in tax.
Investment bonds (insurance / life assurance bonds)
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% 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% limit can be carried forward to future years (although the total cannot be greater than 100% 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% 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:
- 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% annual allowance. Tax liability is calculated on the amount withdrawn above the 5%.
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% of their investment and defer the tax on this until the bond ends.
Offshore investment bond
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 - where Prudential International is registered. Tax treatment can vary from one type of investment to another, and from one market to another.
For more information read about the tax benefits of offshore bonds.
For specialist tax advice, speak to a tax specialist or contact a financial adviser. There may be a change for financial advice.
Taxation rules and regulations may change in the future. This information is based on our understanding, as at January 2015. Tax position depends on your own circumstances.