With so much attention focused on venture capital trusts, it is easy to lose sight of the many areas of investment which financial advisers should be considering if they are to help clients make the most of their tax breaks in this tax year and next.However, it is perhaps fitting to look at VCTs first and examine why they are so high on the investment agenda. New rules introduced by Chancellor Gordon Brown have made VCTs attractive to a wider range of investors by skewing the tax advantages away from capital gains tax to income tax. Investment has also been allowed in more established companies, particularly those listed on the Alternative Investment Market. The headline attraction is that full income tax relief at 40 per cent can be obtained for two tax years, provided the investment is held for at least three years, whether or not the investor is a higher-rate taxpayer. The maximum which can be invested in each tax year is 200,000, implying maximum tax relief of 80,000. But is the up-front tax relief the right reason for investing? With minimum investments of around 3,000, there is concern that smaller investors will tempted into schemes which are not appropriate for their timescale or attitude to investment risk. What is not so well publicised is that all gains and dividends in a VCT are tax-free. This may have big advantages for the income-seeker. Many managers aim to provide dividends of 5 per cent and grow those dividends by 5 per cent year on year. PensionsProper consideration needs to be given to ensure that clients are in a position to take best advantage of the new regime following A-Day. Clients with funds in excess of the proposed 1.5m cap should give careful consideration to maximising contributions now and ringfencing the scheme in advance of A-Day. IsasClients should ensure they use their Isa allowance. Isas might not be as attractive following the abolition of dividend tax credit but are still CGT-free and it is often forgotten that income is tax-free. Unit trusts/OeicsEquity income funds are a popular medium for income-seekers. With expectations of returns on equities in the region of 7 to 8 per cent and dividend yields on income funds around 3.5 per cent, this represents 40 to 50 per cent of the total return. Dividend yields comfortably match building society savings rates and investors should not ignore the opportunity but what of capital gains? How can these be used to produce income? Consider an investor who put 100,000 in a fund at a price of 1. The price has grown to 1.50. The investor encashes 16,400 units for 24,600. The gain is calculated by the price differential of the units, not the cash value, so the gain is 16,400 units at1.50 (24,600) minus 16,400 units at 1 (16,400) = 8,200.The gain equals the annual CGT allowance, so the encashment is tax-free. This takes no account of indexation or taper relief. Structured productsMany structured products are assessable to CGT rather than income tax. Within an Isa or Pep transfer, this is very attractive. As minimum and maximum returns on such products are known in advance, planning is made considerably easier. Structured products differ widely by way of the returns and guarantees and also the tax treatment of income and gains. Life insurance bondsBefore encashing bonds, it is necessary to consider the potential tax implications. Can encashments take place either side of the tax year to spread the chargeable gain? Can bonds be assigned to a spouse or children who are basic-rate taxpayers? If only partial encashments are to be made, full encashment of a number of segments will generally result in a significantly lower chargeable gain than encashing equally across all segments.
Just Retirement marketing and product manager Nigel Barlow says equity-release plans have been labelled distress purchases but are becoming an integral part of retirement planning.
The 2.25bn Foreign & Colonial investment trust is putting US-based fund managers to run its larger cap portfolio in the US, in response to poor performance. The North American portfolio, which accounts for 23 per cent of the trusts overall assets, returned just 1.1 per cent in 2004 compared to the FTSE North American index […]
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Fees under pressure. Regulatory moves against closet indexers. Rapid advances in financial technology. Shifting sentiment among investors. Such mounting challenges have led to widespread speculation about active management’s shrinking future. But a closer look inside intelligent portfolio construction today tells a story of expanding roles, added value, and innovative risk-adjusted, lower-cost solutions. Four investment experts […]
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