Is the answer behind us?

17 March 2017

The new Chancellor, Phillip Hammond MP, has attracted many newspaper headlines in the last few weeks with his change in dividend tax and, of course, National Insurance Rates. This has caused much consternation for the self-employed, directors and investors alike.Effectively, in current terms, the first £5,000 of gross dividend income is tax free and thereafter taxed, and this allowance is being reduced to £2,000 gross from the start of the tax year 2018/2019. This 'allowance' was only introduced in April 2016, so is a 'new kid on the block' of favourable tax changes – and, many would argue, much needed by the growing ranks of the self-employed.

Reflecting on this change reminds me of investment tax changes that occurred around 2007 that made equity ownership (either in the form of shares or Unit Trusts at the time (now Open Ended Investment Companies (OEICS), beneficial for dividend tax purposes, rather than holding investments in an investment bond. This was detailed in The Telegraph at the time here:

To be clear, if you were already invested in an investment bond, it was usually worth staying there. However, if you were looking to invest new money, a comparison usually favoured the Unit Trust route from a tax perspective.

One downside of investment bonds, usually offered by insurance companies, was that their initial charging structures were high (certainly in comparison to the new, more transparent 'clean' share classes of most OEICs of today).However, with careful planning, they could be a useful financial planning tool in providing regular capital, (some refer to it as income, which technically it is not), over time.

Unit Trusts had/have the advantage of allowing you to use your Capital Gains Tax allowance (£11,300 in the new tax year 2017/2018), whereas an (onshore) investment bond is notionally taxed at the basic rate of income tax whilst invested, with the ability to withdraw 5.0% of the initial capital invested per annum without a further liability to tax at the point of withdrawal (although there could be a liability later!).

Another issue is that the 5.0% pa withdrawals are classed as a return of capital when considering gifting from surplus income to place funds outside the estate for inheritance tax purposes. Therefore, if someone is using the surplus income rule to gift funds away, money coming in from an investment bond cannot be included. However, it can be used for the annual gift allowance of £3,000.

There is much to consider; however, in looking at the title of this blog, 'Is the answer behind us?' in putting in place new investment bonds as an investment / tax structure, I think the answer still remains no, although the tax goalposts are moving and, as you would expect, we will keep a close eye on this position and adjust our investment planning approach as and when appropriate.

As we noted in our last blog, following the last Spring Budget, change brings opportunity and it is usually a great time to focus on your financial planning, especially as we approach the end of the tax year.

No individual advice has been provided during the course of this blog.

Keith Churchouse FPFS


CFP Chartered FCSI

Chartered Financial Planner

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