Managing bond investments to help save tax for your clients
An onshore bond provides some tax planning opportunities that can help to reduce your clients’ tax bills — which can help you demonstrate the value of your advice.
Taxation on a bond investment
Prudential pays tax on income and capital gains accrued within the bond, which is regarded as the equivalent of the client paying capital gains tax and basic rate income tax of 20 per cent. However, the internal tax paid within the bond is likely to be lower than this.
In a collective investment, any interest is taxed at 20 per cent and any dividends are paid net with a 10 per cent tax credit.
For a basic rate client, this means that, as long as any withdrawals are within the tax deferred allowance, there should be no tax liability, either income tax or capital gains tax, until the bond is finally cashed in.
As corporation tax rates are reducing to 20 per cent from 1 April 2015, companies will have no additional corporation tax liability on onshore bonds as the tax liability will be deemed paid within the bond.
Tax efficient withdrawals
An onshore bond has a tax deferred annual five per cent allowance of the amount invested for withdrawals. The five per cent allowance can be built up over time — giving more flexibility for allowable withdrawals.
For example, Andy invests £50,000 into a bond. After four years, he decides to take a withdrawal to help fund his daughter’s wedding. He can take up to 4x five per cent = £10,000 as a withdrawal without triggering a tax assessment, provided he has not taken any withdrawals since the initial investment.
If the withdrawals exceed the five per cent cumulative allowance, this may result in an immediate income tax liability.
Prudential issues our bonds as a number of identical policies, which gives flexibility to fully cash in one or more policies, rather than spreading large partial withdrawal across the whole bond, which can reduce the client’s income tax liability depending on their circumstances.
When is a tax assessment required?
For onshore bonds, personal tax is payable when a gain is calculated on a chargeable event. The main chargeable events are:
- Withdrawals in excess of five per cent tax deferred allowance
- Cashing the bond in
- Assignment of the bond in exchange for money or money’s worth
- Maturity (if the bond has an end date)
For chargeable gains, the investor is treated as having paid tax at the basic rate on the amount of the gain — so additional tax is only due if clients are or become a higher-rate or additional-rate taxpayer.
Clients who move into either higher- or additional-rate bands may be able to reduce the value of the gain using top slicing.
This is based on our understanding as at September 2014 of current taxation, legislation and HM Revenue & Customs practice, of all of which are liable to change without notice. The impact of taxation (and any reliefs) depends on individual circumstances.