Low Risk Capital Gains Investment?

insomniac

Hi All,

I've used up my ISA allowance for the year but have more money sitting in the bank. I'm wondering I can use the CGT allowance to obtain a better return than the 5% AER (gross) the money is getting in a First Direct account.

I'm a bit confused about which investments are taxed as income tax and which are treated as capital gains? I assume shares are the latter. Does that include shares in investment trusts that focues on fixed-interest investments? (eg. Midas Income and Growth MIGT)

Anyway are there any recommendations or examples of relatively low risk investments that are tax effective via use of the CGT allowance?

Thanks!

dunstonh

Unit Trusts/OEICs/ITs can be used. These are potentially liable for CGT but you have your personal allowances to use against them.

Or you have investment bonds which give rise to no personal CGT liability. The same unit trust/OIEC funds are generally available on investment bonds now.

There is a large range of cautious funds which could be used to suit the low risk investor.

EdInvestor

Low risk commercial property funds and investment trusts will become eligible for the S&S ISA this year if you haven't used the 4k available there in addition to the cash ISA 3k allowance. Like shares, their dividends are tax free for basic rate taxpayers, and any capital gain comes within the CGT allowance, so you can hold them tax free outside the ISA as well.

moneytroll

I don't quite understand: if investment bonds outside ISA are not subject to cgt then they are as good as UTs/OEICs inside an ISA but with the bonus that you can invest more than 7k into them per year. and if the same funds are available through investment bonds than why do people still use ISA? (which is mostly for the reasons of avoiding CGT and avoiding paying the extra tax if you are a higher rate tax payer)
I am sure i am missing something, but i don't see it.

I think also if your fund (within UT/OEIC but outside ISA) consists of more than 50% of bonds/gilts, there's also no CGT liability...

dunstonh

I don't quite understand: if investment bonds outside ISA are not subject to cgt then they are as good as UTs/OEICs inside an ISA but with the bonus that you can invest more than 7k into them per year. and if the same funds are available through investment bonds than why do people still use ISA? (which is mostly for the reasons of avoiding CGT and avoiding paying the extra tax if you are a higher rate tax payer)
I am sure i am missing something, but i don't see it.

Investment bonds pay CGT within the fund leaving no personal liability to the individual. This means it isnt tax free but tax paid. There are tax advantages to higher rate tax payers. who can defer any potential liablity until such time that they are a basic rate tax payer and therefore totally avoid paying any higher rate tax. Investment bonds for basic rate taxpayers are usually better when annual gains are likely to be in excess of the CGT allowance or they already use the CGT allowance and would face a liability.

Also, nowadays, investment bonds can actually offer lower charges than unit trusts for the same funds some of the time. A big turnround from a few years ago when they used to be expensive. However, like any product class, a number of the old expensive style contracts still exist.

Cook_County

Offshore investment bonds are in my opinion a better class than onshore because they pay no CGT annually so enabling gross roll-up until encashment. The same 5% a year rule applies as to onshore ones. I am surprised that these have not been mentioned.

Low-risk investors may also wish to consider gilts or corporate bonds/ corporate bond funds.

Chrismaths

And Offshore bonds are now pretty cheap (assuming you have a large amount of money to invest). With a decent IFA, you should be able to get in for 1% + IFA's fee for £100k, with ongoing wrapper cost of around £90 per quarter. But you can only buy collectives (OEICS, unit trusts, investment trust etc) within them, otherwise you get a stonking tax charge.