5% allowance on long term investments?

Pharrisman

I have an amount of monies invested to provide a monthly income for me and my family. This money is in long term investment and I cannot draw the capital without big penalties. I have been told by an IFA that I can claim a "tax allowance" of 5% of the capital invested per annum and not declare it as income so avoiding a tax, but the HMRC local offices claim that no such "allowance"exists. Does somebody please have an answer?

stanmoresaver

Pharrisman wrote:

I have an amount of monies invested to provide a monthly income for me and my family. This money is in long term investment and I cannot draw the capital without big penalties. I have been told by an IFA that I can claim a "tax allowance" of 5% of the capital invested per annum and not declare it as income so avoiding a tax, but the HMRC local offices claim that no such "allowance"exists. Does somebody please have an answer?

Very much depends what the investment vehicle is- If it is a Life Assurance Investment Bond, and I think this is the type of plan that your IFA is refering to then his description is mis-leading.

Under these type of plans, they are deamed as 20yr term plans and therefore an annual 5% withdrawal constitutes return of capital. Nevertheless, the gain at the end of the term could trigger a chargeable event which could create a higher-rate tax liability.

Consult the tax office and IFA again.

:mad:

dunstonh

I think its a mistake of terminology. The IFA is correct but its not an allowance and its not avoiding tax as such.

Tax is paid on the investment funds behind scenes so the benefits are paid to you with no further liability for non, lower or basic rate taxpayers. Higher rate tax payers would have a further potential liability on a chargeable event. Withdrawals above 5% would trigger a chargeable event but at 5% or under, it defers the liability. If the higher rate taxpayer is a basic rate taxpayer at the time of maturity or surrender (for example) then extra tax does not need to be paid (borderline Higher rate payers may still find a small liability)

In reality, if you are a basic rate tax payer or lower, the 5% rule is really a non issue as you arent going to face any tax liability anyway. However, the IFA is correct that if you keep it to 5% or lower you will face no tax liability. The tax office is also correct in saying that this is not an allowance. Its just part of the taxation that surrounds this product.