HL to review all investment bond sales

jem16

EdInvestor wrote: »

The argument for using the bond if the investor wants to put 100k wholly in bonds would IMHO fall down because the reduction in yield would be too high after tax and charges. The effect will be much the same as what we see with the zombie endowments.

It might be useful for property funds though, as many of the better funds at the life companies are only available through this route anyway.

Why would you use the IB purely for bonds or property funds?

EdInvestor

If I bin the bond as you suggest I will have to pay an extra 25% tax on dividend payments. Assuming even a small 2% yield then that will be another £600pa on tax.

This comment would suggest your portfolio is invested mainly in equities, not in high yielding assets such as bonds property ( or even high yielding shares;) ).

What DH and I are saying is that such low yielding assets are likely to be better held outside the bond wrapper.

EdInvestor

Why would you use the IB purely for bonds or property funds?

Because the change in the CGT rules means there is no advantage in using the bond for equities, particularly growth funds.See posts further up the thread.

eg if you have a fund of 100k and it makes gains of 10k of which 8k is capital growth and 2k is dividends, then inside the bond you will pay 20% tax on the 8k growth (ie 2k) and nil on the dividends.

Whereas outside the bond you will pay nil on the capital growth (covered by your annual 9.2k CGT allowance) and 600 pounds on the divis.

So you are down 1,400 by using the bond.

Even if you have a much larger fund so that you have capital gains which are not covered by the annual allowance, an HRT will now pay only 18% tax (formerly 40% on them, compared with 20% in the bond.

So there's little point in using the bond except possibly for assets that provide income based returns, not capital growth, but only if charges are low.

eg a property fund might make 7% returns of which 2% capital, 5% income. In the bond you would pay 20% on the capital growth (ie 500 pounds) and nil on the income. Outside the bond an HRT would pay nil on the capital (within allowance)
but 20% on the income (1,000 pounds).So the bond is the winner as long as the charges are not high and the investor is certain about eventual BRT tax status at the bond's maturity.

dunstonh

Inside the bond neither the BRT nor the HRT would pay tax on the income until the bond is cashed in, at which point if the investor is on HRT, he has to pay another 20% tax, ie 40% in all..

Higher rate taxpayers who will be basic rate taxpayers in the future are one of the main types that are best suited for investment bonds. They avoid higher rate tax whilst its in the bond, deferring liability until such time they are a basic rate taxpayer so they can then create a chargeable event with some or all of the funds and not pay any higher rate tax due to top slicing relief.

That hasnt changed with the exception that higher risk, higher rate taxpayers investing in low/no yield funds may now be best served with unit trusts rather than investment bonds. Higher yield funds (which could include UK equity income potentially) will still be best in the bond.

There is zero argument for anyone on BRT using a bond, especially now all the IHT trusts etc are unnecessary and the care costs system is under review.

Not the case. These small invesmtent bonds you often see shouldnt be taking place now (and as we have said here a number of times before, they shouldnt have taken place anyway). However, the following are cases where basic rate taxpayers can still benefit by use of a bond:

1 - Estate planning. The thresholds may be high but you can be capital rich and still be a basic rate taxpayer. I have a number of millionnaires who only pay basic rate tax.
2 - Over 65s close to age allowance reduction.
3 - Pension credit and local authority care means test avoidance
4 - basic rate taxpayers where increased income would see them enter higher rate tax
5 - not beneficial from a financial point of view but some people dont want the hassle of dealing with tax returns and CGT allowances and having to pay HMRC manually and wont mind paying the extra in tax to avoid all that. Plus, the costs in switching on unit trusts can often include a new bid/offer spread or initial charge and switching costs. None of which exist on bonds.
6 - Trusts.
7 - lower charges. Assuming like for like distribution channels, the bond can be cheaper than unit trusts. Depending on those charges, that may offset the difference in tax.

jem16

EdInvestor wrote: »

This comment would suggest your portfolio is invested mainly in equities, not in high yielding assets such as bonds property ( or even high yielding shares;) ).

It wasn't meant to suggest anything about my portfolio and indeed it would be a pretty unbalanced portfolio if that was the case.

The simple point that was being made is that dividend payments outside the bond are subject to extra tax for an HRT.

What DH and I are saying is that such low yielding assets are likely to be better held outside the bond wrapper.

As they are.

Stop making assumptions Ed.

Because the change in the CGT rules means there is no advantage in using the bond for equities, particularly growth funds.See posts further up the thread.

There are still many high yielding equities that will be better inside a bond for HRT payers as DH said.

EdInvestor

High yielding equities are likely to be a case where it's better to use the ISA because they often come with high capital growth as well.In that case tax free N&SI index linked certs are a useful home for the cash and cash-like component of a portfolio for an HRT.

jem16

EdInvestor wrote: »

High yielding equities are likely to be a case where it's better to use the ISA because they often come with high capital growth as well.

My equity ISA is being fully utilised.

In that case tax free N&SI index linked certs are a useful home for the cash and cash-like component of a portfolio for an HRT.

Got some cash there too thanks.

dunstonh

Financial Times have an article posted late with Mark Dampier of HL saying "that investment bonds had been oversold but might still have some value for investors claiming age allowance or seeking to defer tax".

That seems to mirror the line that we post here all the time.

EdInvestor

https://www.ft.com

Separately, the Association of British Insurers has sought an urgent meeting with ministers to protest about the impact of the CGT changes on the investments sold by life assurance companies.The introduction of the 18 per cent CGT rate, which amounts to a tax cut for investors in non-business assets, poses a threat to sales of investments such as unit-linked bonds, worth over £20bn last year. In many cases, these bonds, on which gains are taxed as income rather than capital, will be taxed more heavily than investments such as unit trusts.
The popularity of investment bonds has attracted controversy in recent years because financial advisers receive large commissions on their sale. Mark Dampier, of Hargreaves Lansdown, investment adviser, said that investment bonds had been oversold but might still have some value for investors claiming age allowance or seeking to defer tax.