Taking income from Onshore Bond or Unit trust

EJV_2

Hi,
I have a unit trust that produces dividend income, this is currently being reinvested. I also have a onshore investment bond. I need to start drawing income but I am not sure where best to take this from? I am aware that I can take 5% tax deferred income from my bond and this will provide regular, fixed withdrawals. I utilise my dividend allowance each year and the excess dividends are taxed at 7.5%. But the dividend income fluctuates and is uncertain? Any suggestions of how best to facilitate my income shortfall?

Malthusian

Impossible to answer with the limited information given.

You can take fixed withdrawals from the unit trust as well (if the provider doesn't allow this you can transfer to one that does). If it is not within an ISA then taking fixed withdrawals from a unit trust might generate capital gains, but you have to realise over £12,000 per year in gains before you generate a tax liability.

Onshore bonds are taxed on income and gains within the bond and are rarely tax-efficient now.

If you start taking the dividends from the unit trust then you are taking money that is already being taxed and if you start taking withdrawals under the 5% allowance from the bond you won't pay extra tax for the moment. (Withdrawals over the allowance may also not generate any additional tax unless the chargeable gain takes you into the higher rate tax bracket.) It is not likely to make a huge amount of difference either way, especially in the immediate present, unless we are talking really large sums of money.

If your combined investments are somewhere around the £100k+ bracket you should consider seeing an Independent Financial Adviser as they may be able to save you money on ongoing tax.

Joe9090

Malthusian wrote: »

Onshore bonds are taxed on income and gains within the bond and are rarely tax-efficient now.

Perhaps I am wrong but I thought you could take 5% tax free per year from Onshore Bonds.

bowlhead99

Joe9090 wrote: »

Malthusian wrote:

Onshore bonds are taxed on income and gains within the bond and are rarely tax-efficient now

Perhaps I am wrong but I thought you could take 5% tax free per year from Onshore Bonds.

You can, and the 5% is cumulative with unused parts able to be carried forward to take in future years, as long as the cumulative 5% allowance doesn't go over the amount you paid into the bond.

However, one of the reasons you are able to take money out without paying tax is that the bond is taxed internally on the income and capital gains. So, you have still 'paid' tax even though it might not need to go through your personal tax return. These days, investment bonds are usually down the pecking order except for some particular planning reasons, because more modern options such as ISAs are more efficient (no tax internally or when you cash them in).

Malthusian

Joe9090 wrote: »

Perhaps I am wrong but I thought you could take 5% tax free per year from Onshore Bonds.

Bowlhead's answer is why it's properly called "tax deferred" rather than "tax free".

In addition to the bond being taxed on income and gains, the withdrawals are eventually added into the tax calculation on eventual surrender, death or another chargeable event. (Though these events may not necessarily involve extra tax being payable because you may have already paid it within the bond.)

For many investors with allowances available, onshore bonds are less tax-efficient than holding investments unwrapped. If ISAs and pensions are for people who want to invest tax-efficiently then onshore bonds are for people who want to pay voluntary tax.

Unless you know exactly what you're doing. There are scenarios in which an onshore bond can be tax-efficient (e.g. trusts) but if you don't know why you hold an onshore bond you're probably paying voluntary tax.

SonOf

Investment bonds in the past could be a low cost way to invest with the tax treatment broadly similar to unwrapped UT/OEICs. The problem is that the rules on dividends changed and this makes unwrapped UT/OEICs a better option for most people now. This is why you find IFAs managing exits from investment bonds. Often over multiple years to avoid tax issues.

On the whole, apart from specialist tax areas, investment bonds are now a niche option that are no longer suitable for most people. There are caveats to that as some types of investment with these bonds is no longer available as cost-effectively and the extra tax is less than the extra cost of the modern version.

So, rather than asking which is best to take the income from, you should be looking at the whole scenario of tax and adjusting your investment wrappers accordingly. Sometimes that may require multiple years.