Investments and tax

Our following pointers are designed to help you understand any tax that you may need to pay on your investments. Tax situations are based on individual circumstances and are subject to change.

Personal Savings Allowance

A Personal Savings Allowance (PSA) has been introduced from 6 April 2016 to savings income, whereby banks & building societies will no longer deduct tax at source from interest i.e. it will be paid gross. There will be a new 0% Income Tax rate for up to £1,000 of savings income received by a basic rate (20%) taxpayer, or up to £500 of savings income received by a higher rate (40%) taxpayer.

Capital Gains Tax

You can achieve a certain amount of gains every year from selling investments  without paying Capital Gains Tax. You can also transfer investments to your spouse or / civil partner to make use of such exemptions.

More information on personal Income Tax and Capital Gains Tax can be found at gov.uk.

ISAs

In 2016/17, you can  invest up to £15,240 per year in a Cash or Stocks and Shares ISA or a combination of the two.  You can invest in one Cash ISA and one Stocks and Shares ISA each tax year.  You will not pay any tax on any of the income you receive from ISA savings and investments. Nor will you pay any tax on capital gains arising on ISA investments.

From 6 April 2015, an additional payment could be made on top of the annual limit by a surviving spouse or civil partner of a deceased ISA holder. This additional subscription was limited to the value of the deceased’s ISA at their death.

Unit Trust and Open-Ended Investment Companies (OEICs)

Where your chosen fund pays dividends, the taxation situation from 6 April 2016 is as follows:

New rules for the taxation of dividend income will abolish the dividend tax credit and a new annual dividend tax allowance of £5,000 will be introduced. The dividend allowance will mean that you won’t have to pay tax on the first £5,000 of your dividend income. You’ll pay tax on dividends you receive over £5,000 at the following rates:

7.5% on dividend income within the basic rate band
32.5% on dividend income within the higher rate band
38.1% on dividend income within the additional rate band

Where your chosen fund pays interest, the Personal Savings Allowance (see above) will apply to the taxation of interest received from unit trusts and Open-Ended Investment Companies.

Investment bonds (insurance / life assurance bonds)

Onshore investment bonds

UK Investment Bonds are non-income producing investments and so have a different tax treatment from other UK based investments. This can provide valuable tax planning opportunities for individuals.

The funds underlying the bond are subject to UK life fund taxation meaning that you are treated as having paid tax at the basic rate on the amount of your gain. This notional tax is not repayable in any circumstances. You will have no liability to capital gains tax or basic rate income tax on bond gains.

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 withdrawals from the bond (in excess of the accumulated 5% allowances) until that time. If you do this, you may not need to pay tax on any gains from your bond.

Certain events, also known as chargeable events, that can occur during the lifetime of your onshore investment bond may trigger a potential income tax liability:

• Death giving rise to benefits
• transfers of legal ownership of part or all of the bond (though not gifts)
• On the maturity of the bond (not applicable for  whole of life policies)
• On full or final encashment 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. Top slicing relief may assist in reducing the rate of tax charged by applying a spreading mechanism.

As you are treated as having  paid basic rate tax on the amount of the gain, 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.

Special rules apply to trustee held bonds.

Offshore investment bonds

Offshore is a common term that is used to describe a range of locations where companies could 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 location to another.

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. Withholding Tax is deducted from interest and dividends received by the fund.

The lack of tax on an offshore bond means that potentially it could grow faster than one that is onshore, although this isn't guaranteed. Note that tax may be payable on a chargeable event, similar to those within an onshore bond,  at a basic, higher or additional rate tax as appropriate.

Remember that the value of an investment can go down as well as up and you may not get back the amount you put in.

Further information

For more information, please speak to a tax specialist or contact a financial adviser. Further guidance can also be found at gov.uk.

We are not recommending one option over another or providing advice.

Tax rules require careful consideration and may not reflect your individual circumstances.  The above is based on our understanding of current taxation, legislation and HM Revenue & Customs practice, all of which is liable to change without notice.

Need help? Have questions?

If you're looking for further information or want to chat about your product options, we can help.

Contact us