Investment Bonds, Collectives and Tax
The rate of Capital Gains Tax (CGT) for disposals made after 23rd June 2010 will rise to 28% for individuals whose total income and capital gains are above the basic rate income tax limit.
The income tax personal allowance will rise to £7,475 in 2011/12 and the basic rate limit (£37,400 for 2010/11) will be reduced so that higher rate taxpayers do not benefit from this £1,000 increase.
The retention of the annual exemption for CGT at £10,100 is significant.
An individual’s total income in 2010/11 can be up to £43,875 (£6,475 + £37,400) and not pay higher rate tax. An individual’s annual capital gains can be up to £10,100 and not pay any capital gains tax.
The change will re-invigorate the single premium Investment Bond versus collective investment funds debate.
Investment Bonds are written under life assurance legislation and onshore Investment Bonds pay special life company rates of corporation tax (assumed to be 20%) on income and gains inside the Investment Bond.
Any gain on encashment is divided by the number of relevant years to produce an average yearly gain, which is treated as the top slice of income in the tax year in which the gain falls. It remains important to ensure this gain does not take an individual from a lower rate tax payer to a higher rate payer, otherwise tax in addition to the 20% already paid, inside the bond is payable by the individual.
In our opinion, the retention of the CGT annual exemption, coupled with the greater choice and lower costs of a portfolio of collective investments on a wrap platform will often be the better option for clients.
A major advantage of single premium Investment Bond is the simplicity of receiving up to 5% withdrawals each year for twenty years as a return of capital.
As always, individual circumstances need to be assessed before making final recommendations.
