Taxing Questions

Most of us face being taxed on our income, our capital gains, and in some circumstances the value of our estate when we die.

Taxation can be very complicated and the rules, reliefs and allowances often change, so it is worth obtaining a clear grasp of how these taxes work by discussing with a professional adviser the most efficient way to arrange your finances.

An expert will be able to help you plan your taxes in advance, and come up with effective strategies that will use the lawful reliefs and allowances to minimise the amount you have to pay.

By understanding how taxation works, you should be better prepared to manage your finances and you could save money in the long run.

One thing can be said for all forms of tax: if you do nothing, it is highly likely that you will end up paying more to the Government than you actually need to do.

For further information about the 2024 Budget changes please click here.

Investing in Offshore Collective Funds

Offshore investment vehicles include unit trusts, mutual funds or investment companies. The offshore company will normally be situated in a country where the investment fund pays little or no tax on its income or gains. While this does allow the investor some benefit while invested, if the proceeds are brought back to the UK they will be taxed at that point.

Risk & Reward

As with any other investment the risks and rewards will be dictated by the investment strategy and decisions of the investment managers. However, it should be borne in mind that many offshore investments do not benefit from the legislative and regulatory protections that UK authorised investments have.

Capital Investment bonds are life insurance contracts used for the purposes of investment. They are designed to give capital growth and/or income over the medium to long term with access to your money by taking regular or one-off withdrawals. Most bonds are designed for investment over at least five years. If you cash in your investment before that time, you are likely to be charged an early-surrender penalty.

Bonds are set up through insurance companies without the need for a check on your health status and normally people of any age can hold a bond. Bonds can be opened onshore (within the UK) or offshore (usually in the Isle of Man or the Channel Islands) to take advantage of tax concessions. The decision will depend on your personal tax situation.

Most bonds have no upper limit on how much you can invest, but barriers to entry can start higher than other investments, with a £10,000 minimum contribution being typical.

Fixed interest investments is the term used to describe Government and Corporate bonds (which should not be confused with ‘investment bonds’ which are a kind of life insurance policy).

These kinds of bonds are loans to governments or companies that guarantee to pay the bondholder a specified level of income (called the ‘coupon’) for a specified period of time. At the end of that time the bond issuer will repay the capital loaned.

Role in investing

Fixed Interest securities are important in diversified investments and investment strategies by:

• Providing a reliable income stream and liquidity
• Providing an element of capital security

The risk of fixed interest investments is that the bond issuer defaults on either the interest payments, or the repayment of capital.  Historically speaking fixed interest investments have not provided the same levels of return as equity investments, but the risk to an investor’s capital is generally lower.

As a rule of thumb the rate of interest offered increases with the risk of the issuer defaulting.

Generally speaking, fixed interest investments are divided into 3 groups:

Open Ended Investment Companies (OEICs)

An OEIC works in a very similar way to a unit trust except that an OEIC is legally constituted as a limited company (Plc). OEICs have been operating outside the UK for some time, but only since 1997 has it been possible to operate an OEIC in the UK.

OEICs are not trusts and do not therefore have a trustee. Instead, however, they have a depository which holds the securities and has similar duties to a unit trust trustee.

Most OEICs operate as umbrella funds which means that the OEIC is authorised and then can set up sub-funds without gaining individual authorisation for individual sub-funds. Each sub-fund has different investment aims, e.g. a sub-fund may specialise in the shares of small companies or in a particular country, e.g. the USA. Each sub-fund can also have different charges and minimum and maximum investments. Unit trusts are allowed to do this too, but few do.

Endowment Policies

These are life insurance policies that are designed to pay a lump sum after a specific term, and pay out a guaranteed sum if the person insured dies within the term of the plan.

Although it is still possible to buy endowments that guarantee the value of the lump sum at maturity, the majority of policies do not guarantee the maturity value - the money that you get back will depend on the value of the investments within the policy.

By using life insurance policies, the value of the plan at maturity can be paid without paying any further tax if certain ‘qualifying conditions’ are met. Although the policy holder can avoid paying any tax at maturity, the insurance company does pay tax on income and gains within the policy.

These policies can be particularly useful if you have an investment objective you’d like to realise regardless of what happens to you, for example to repay a mortgage; provide a legacy for your children; provide for university fees etc.

The least risky of investment options are those offered by National Savings, which raises money on behalf of the UK Government.

While investment returns are not spectacular and some involve tying your money up for long periods of time they are nevertheless stable and in some cases can be paid tax free.

They include National Savings Bank accounts and various forms of savings and Income Bonds. These savings and investment products are backed by H.M. Treasury, which makes them the most secure cash products available in the UK.

The financial conduct authority does not regulate on national savings products.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.

With-profits Policies

A with-profits policy is a type of investment fund.

Policies that are with-profits give the insured the extra benefit of a possible bonus that is a share of the profits from the funds that the premiums have been invested in.

Individual Savings Account (ISA)

ISAs represent a tax-efficient container in which to place cash savings and investments in equities, bonds and collectives.

An ISA is available to all UK resident individuals and to Crown servants (for example, those in the UK’s armed forces, diplomatic service or overseas civil service) and their spouses or civil partners who are not resident in the UK.

To open an ISA:

• You must be over the age of 18 for cash ISAs
• Over the age of 18 for stocks and shares ISAs
• You cannot hold an ISA with or on behalf of someone else.

Frozen ISA Allowances for the 2024/2025 tax year

Investing in Equities

Investing in equities means buying stocks and shares in companies listed on the stock exchange. Historically this brings greater rewards than investing in bank accounts and bonds as you have the possibility of gaining not only a dividend - a proportion of the company's after tax profits distributed to shareholders - but also a capital appreciation. If the price of the shares goes up after you buy them then you have made, on paper at least, a capital gain.

But with these increased rewards comes greater risk as the value of shares can go down as well as up, which means you risk losing your investment if the price of the shares falls.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.