What to do with £200K?

theclaretvillain

My wife is soon to inherit £200K.:j
We have no mortgage or other debts.
We pay tax at 40%.
Plan to retire in the next 3 - 5 years.
We will put as much into ISAs as possible.
What would you do with the rest for reasonable growth?
Also what to do in the short term - she may get the money on Monday.
TIA.

theclaretvillain

p.s. We are both still earning so medium (say 5 to 10 year) tie up is not a problem.

Steve_xx

All of the following pay 6% plus.

Put 3k each in a cash ISA with National Savings, (Direct ISA). Put the remainder into a Sainsbury's Bank Account (Internet Saver), an ICICI Bank account, or an Icesave Bank account. All are instant access, without penalty.

Here's the appropriate links:

http://www.nsandi.com/products/disa/rates.jsp

http://www.sainsburysbank.co.uk/savi..._is_skip.shtml

http://www.icesave.co.uk/

jem16

With that amount of money you really want to see an IFA.

With paying 40% tax on any savings account you are going to find it very difficult, if not impossible, to keep ahead of inflation.

dunstonh

ISAs and investment bonds (onshore or offshore).

The ability to not pay higher rate tax on the bonds by holding on until basic rate taxpayer and then using top slicing relief to avoid higher rate tax is the main gain with the bonds. The amount is perhaps a tad small for offshore bonds but its spot on for onshore. Although either could offer advantages in certain scenarios.

EdInvestor

60k (30k X 2, 15k per issue) into National savings and investment index linked certificates where interest is tax free - top return for higher rate taxpayers

If you invest direct into shares or equity funds, focusing on those which have only low dividends, you should be able to avoid most tax: you'll pay 25% on the divis, but that's still a lot lower than 40% on tax, bonds and property funds outside ISAs.

Annual allowance on realised capital gains is 9.2k each, nothing to pay if you don't realise any gains, and you can sell and reinvest more than 18k a year tax free.

Check carefully the underlying fees, taxes and withdrawal penalties involved in investment bonds. You may find there is little advantage to them.For instance you pay 20% tax on capital gains in the bond, which you could avoid quite easily outside it.

They may be suitable for part of your money, but the excessive enthusiasm they prompt in advisors in most cases is commission based.

dunstonh

Check carefully the underlying fees, taxes and withdrawal penalties involved in investment bonds. You may find there is little advantage to them.For instance you pay 20% tax on capital gains in the bond, which you could avoid quite easily outside it.

Of course, none of that is necessarily applicable.

I quoted on an offshore bond today utilising unit trust funds at institutional pricing. Basically meaning no initial charges on the funds and annual management charges around 0.75% lower than retail. We calculated that it would save around £300,000 in tax over the term if just 5% p.a. was achieved. There isn't a penny of capital gains tax payable on the funds and no exit charges. At 7% it would be over half a million pounds.

So, if this person followed Eds advice, they would have paid around £500k more in tax. As Ed says, "You may find there is little advantage to them"

EdInvestor

Onshore vs offshore bonds: comparison of taxes and charges:

http://www.friendsprovident.co.uk/doclib/ctst32.pdf

jamesd

The use of the stocks and shares ISA and investment bond tax wrappers seem most likely to be suitable, S&S ISA up to the limit for them, then investment bond use. You're probably familiar with S&S ISA use so I'll explain why an investment bond wrapper can be helpful.

If you won't already be using income to fully use your S&S ISA allowances until retirement you should probably allow money for that.

Buying from a competitive vendor an investment bond will increase the initial amount invested by 4-7%, I'll use 6% in this example. The extra comes out of rebated commission paid by the investment bond company to the vendor you buy from. Lets set aside 14,000 for S&S ISA use initially this year and invest the rest. This gives you 186,000 * 1.06 = 197,160 to invest. This can normally go into all the normal investments you can use in a S&S ISA.

Each year you can withdraw 5% of the initial investment without paying additional tax on it. This can be rolled up and used later. For year one you won't need to use it because you set aside 14,000 for S&S ISA purchase. For years two, three and four you can take out 6.667% of the investment, 13145 each year. Close enough that you can probably to it up to fully use the S&S ISA allowance, or just reduce the original investment by another 4,000. This takes care of paying for fully using the S&S ISA allowances for four years from this money.

Within the investment bond wrapper the insurance company pays corporate taxes on increases in investment value, 20% on income, 22% on capital growth. Since tax has already been paid a basic rate tax credit applies and no tax is due from you for gains within the bond. The 5% annual withdrawing is tax free regardless of your tax rate.

When it comes to time to cash in all or part of the bond, your tax rate at that time is used. If you're higher rate now and basic rate in retirement, this saves you the difference between higher rate and basic rate tax, courtesy of this rolling up effect.

If the income from whatever part of the bond you're selling doesn't take you into higher rate, you escape higher rate tax. Since there are two of you, remember that you get two sets of tax allowances and two basic rate thresholds, so consider splitting the investment to maximise the tax benefit.

If the income does take you into higher rate, you benefit from top slicing tax relief.

If you don't need extra income from the bond, you can take the 5% each year and use it to buy more S&S ISA investments and take tax free income from them, increasing as the amount invested increases.

Meanwhile, the investments inside the bond are probably growing by more than 5% a year and you have to decide what to do with that extra money. One option is to wait 20 years and take it all as a lump sum. Probably not the best option because it'll be a big chunk of income in that year and you'll pay higher rate tax on some of it. Instead you might be better served by regulating how much you take out so that it never puts you into the higher rate tax band. You can invest any of this in either S&S ISA investments or in regular unit trusts. Your two CGT allowances will probably be sufficient to handle growth in these investments for a while, since most of the money is going into the S&S ISAs.

And that's why an investment bond or two is useful as a tax wrapper for you: you get to avoid higher rate tax and gradually shift most of your investment into S&S ISAs from which you can take tax free income. After allowing for investment growth and saved higher rate tax the potential gains from reduced tax are very substantial.

CGT allowances alone without the tax wrapper just aren't going to be sufficient for avoiding unnecessary tax if you have decent investments, if only because you have to calculate if you need to pay it when you sell one fund to buy another and that's going to happen quite regularly if the money is well managed. It wouldn't be surprising to see 50% of the investments being moved each year and a few years of growth at say 12% will mean you're over the CGT limit a few years even if you take no income at all. You don't have this problem of being taxed just to move investments around in either the investment bond or the S&S ISA.

If you will be higher rate in retirement you'll need to get an analysis of that case instead.