Tax on investments
What needs to be taken into account regarding tax on investments?
This is obviously too large a question to cover on this website as it depends on your own personals circumstances and what you are trying to achieve from your investment. This is exactly what good tax planning and financial planning covers and mistakes in this area can be very costly over the years.
The phrase “don’t let the tax tail wag the investment dog” certainly applies.
The main point of any investment is to make a positive return over and above cash. There is no point in choosing a bad investment fund or inappropriate type of investment purely because it saves tax.
What types of tax affect my investments?
Three main taxes affect your investments;
- Income tax on the income generated
- Capital gains tax if your profits on sale exceed your annual allowance of £10,100 (tax year 09/10)
- Inheritance tax on death if your total assets exceed your allowances
Are ISAs usually the best type of investment?
Not always. Many independent financial advisers will recommend an ISA if you do not want to tie up your money in pensions. However even ISAs are slightly restricted in the types of funds they can use. Some alternative asset class funds offer steady low risk returns and cannot be utilised via an ISA. In addition as a personal allowance ISAs cannot be placed into trust to avoid inheritance tax and so you may end up losing 40% of the value on death.
Investment advice from a specialist investment adviser like Bluebond is essential.
If I am working and saving towards retirement surely a Pension plan is always the best type of investment?
This does seem to be the generally held belief among many independent financial advisers. However this is not always the case even for higher rate taxpayers. For many of our millionaire clients a pension plan is not always the best route.
For instance if you are definitely financially secure irrelevant of your earned income you may want to consider how you pass as much money on to your children as possible as part of a family financial plan. Pension money if it is used to buy an annuity will die with you.
In addition it’s no good getting a tax saving on the money invested if there are only a few years before retirement only to pay tax on the income for many years in retirement.
Once again good advice from an experienced financial planner is essential.
I have been advised to invest into an investment bond as I can get a tax free 5% income a year?
The taxation of investment bonds is very complex and varies depending on the type of investment funds or assets held and also if the bond is held onshore or offshore.
There is no hard and fast rule to say if investment bonds are a good or bad tax wrapper as once again it depends on what you are trying to achieve. They are certainly useful for estate planning.
The “income” is tax free as it is not regarded as income by the Inland Revenue but as a return of your original capital. If you were taking out 5% a year this would become taxable as income tax after 20 years (5%x20 = 100% of original capital).
Any questions on the tax on investments?
Please call us on 01582 839280 or Email us.
