Investment Bond Wrapper & Supermarkets

EdInvestor

dunstonh wrote: »

You are twisting the information to read like people will be paying 20% on their returns which is not the case. ....

-Corporation tax at 20% on interest, overseas dividends and rental income.
-Corporation tax at 20% on capital gains

But as you later note, that is exactly the case.

dunstonh

EdInvestor wrote: »

But as you later note, that is exactly the case.

What about the 10% tax credit?

MrMicawber_2

I am getting loads of information here which is great but I am now a little confused as I thought that tax within the bond is paid at 20% and after that the following applies:

1) Basic rate and higher income tax payers can take a tax free 5% income of the original capital invested (for 20 years).
2) On encashment
a) Basic rate tax payers have no further tax to pay at all
b) Higher rate tax payers will pay tax at 40% on the capital and will also need to pay tax retrospectively on the 5% income stream

dunstonh

1) Basic rate and higher income tax payers can take a tax free 5% income of the original capital invested (for 20 years).

That isnt income in a taxable sense. It is withdrawal of 5%. The taxable side is handled within the funds. The 5% withdrawal is like going to get your money out through the cashpoint.

2) On encashment
a) Basic rate tax payers have no further tax to pay at all

Not necessarily true. When you have a chargeable gain, you then apply top slicing relief to it and that top slice is added to your income. If you are still a basic rate taxpayer after that, then you pay no further tax. Even if you were a higher rate taxpayer for the bulk of the period. If it takes you into higher rate, the amount that is in higher rate is multiplied by the number of years held (to wind back top slicing relief on that amount) and you pay the difference between basic rate and higher rate on that amount (basic rate tax is already treated as being paid).

b) Higher rate tax payers will pay tax at 40% on the capital and will also need to pay tax retrospectively on the 5% income stream

They will pay the difference between basic and higher rate as basic rate is already treated as being paid. Withdrawals are always brought back into the calculation for top slicing relief.

The key is to segment the bond and create chargeable events in different years. With joint bonds, say husband and wife or partners, the tax calculation is split equally. That can further reduce any liability in future.

For a higher rate taxpayer, the main gains are as follows:
1 - you pay no higher rate tax on the bond whilst you hold it (the dividends on unit trusts would be subject to HRT but not within a bond)
2 - if you are a basic rate taxpayer when you come to surrender some/all of it, you can use top slicing relief to ensure you pay no higher rate tax at all. Therefore all those years you were a higher rate taxpayer you have avoided higher rate tax on your investment.

There is also the "minor" issue that investment bonds where no withdrawals are being taken are not included in the means test for pension credit or local authority care. That may appeal to some and not others.

EdInvestor

dunstonh wrote: »

For a higher rate taxpayer, the main gains are as follows:
1 - you pay no higher rate tax on the bond whilst you hold it (the dividends on unit trusts would be subject to HRT but not within a bond)

An HRT pays 20% lifeco corporation tax on investments within the bond.

If the same investments were held outside the bond, then he would pay 25% tax on the dividends, and 18% tax on any realised capital gains in excess of the annual allowance of 9.2k.Most people would not pay any CGT at all. So effectively there is virtually no gain in holding the bond

The big probalem for the bond arises at maturity when the HRT suffers a further bill - he would pay nothing if the investments were held outside. This makes it much worse to hold the bond.

The BRT need pay no tax on dividends or capital gains outside the bond, but is taxed at 20% inside it, so there never was a good reason to use an IB - a bit of advanace planning with S&S ISAs should be able to resolve any problems with age allowance, especially once cash ISAs can be converted to S&S - using tax free NSI savings certs for the cash.

dunstonh

An HRT pays 20% lifeco corporation tax on investments within the bond.

If the same investments were held outside the bond, then he would pay 25% tax on the dividends, and 18% tax on any realised capital gains in excess of the annual allowance of 9.2k.Most people would not pay any CGT at all. So effectively there is virtually no gain in holding the bond

Again, you have assumed the whole investment within the bond is taxed at 20% and ignored the tax credit. Same investments in unit trust form are going to be better on capital gains but worse on income tax. On like for like distribution channels the charges could also be lower on the bond (with the right bond chosen).

The BRT need pay no tax on dividends or capital gains outside the bond, but is taxed at 20% inside it

That is incorrect and its something you say often and are corrected often.

MrMicawber_2

A couple of note ago there was a referral to paying of 25% on dividends on an investment outside a bond. I thought the following was the case:

Income (dividends) paid by shares within an open-ended investment fund is assumed to be paid after taking 10% tax (the tax credit). These dividends, when paid out of the fund to you, are not subject to any tax if you are a basic rate, lower rate, or non-taxpayer. If you are a higher rate taxpayer then you have an overall tax rate on dividends of 32.5% of the gross dividend (but you can deduct the 10% tax credit). Non-taxpayers cannot reclaim this 10% tax credit.Income (dividends) paid by shares within an open-ended investment fund is assumed to be paid after taking 10% tax (the tax credit). These dividends, when paid out of the fund to you, are not subject to any tax if you are a basic rate, lower rate, or non-taxpayer. If you are a higher rate taxpayer then you have an overall tax rate on dividends of 32.5% of the gross dividend (but you can deduct the 10% tax credit). Non-taxpayers cannot reclaim this 10% tax credit.

EdInvestor

That's correct: for BRTs the tax is covered by the tax credit: for HRTs there is 25% extra to pay (that's the same as 32.5% after you take the tax credit into account).

So to repeat basic rate taxpayers will generally already be covered for tax on divis by the tax credit and have a 9,200 annual capital gains tax allowance to cover any realised gains if they sell.So most have no need to pay CGT at all. If they do have to pay it through bad planning, then the rate has now gone down to 18%.

Whereas gains within the bond would be subject to 20% lifeco corporation tax and the CGT free allowance would be wasted.

jem16

EdInvestor wrote: »

So to repeat basic rate taxpayers will generally already be covered for tax on divis by the tax credit

The exception to this is where the basic rate taxpayer is close to the higher rate tax threshold. The dividends can then push that person into the higher rate and have to pay the extra tax.

dunstonh

jem16 wrote: »

The exception to this is where the basic rate taxpayer is close to the higher rate tax threshold. The dividends can then push that person into the higher rate and have to pay the extra tax.

and over 65s close to the age allowance reduction with larger amounts to invest.