As investors we constantly try to maximise our returns and by using the saltydog data we can hopefully identify the best funds to do that. Whilst choosing the funds may be key to your performance, of almost equal importance is choosing the correct tax wrapper in which to hold those funds.
Whether it is ISAs, pensions, unit trusts or investment bonds, different wrappers will suit investors at different points in their life. It is too big a subject to fully cover on this page but here are some of the key facts that you should consider when investing your money.
Investments grow free of any type of tax and offer complete access to your money at any time. Any fund switches you make within the ISA are also free of any liability. The downside is that you are limited to a maximum investment each tax year of £11,280 (2012/12) so you should always ensure that you make full use of your allowances wherever possible.
Collectives (Unit Trusts/OEICS)
For those investors that have made full use of their ISA allowance this may well be the next choice an just like an ISA you have full access to your investment.
Within a Collective wrapper any sale of units/shares, including fund switches, will be deemed a disposal for Capital Gains Tax (CGT) purposes and may incur a tax charge if the level of gains exceeds your annual allowance of £10,600 (2012/13).
Income tax on dividends arising within a collective will only be an issue for higher rate tax payers but your wrapper provider should provide you with a consolidated tax voucher containing this information at the end of each tax year.
Like an ISA, pension funds grow virtually free of any tax but by far the biggest advantage is the tax relief available on any personal contributions you make, effectively boosting the value of your investment overnight by as much as 50%. The government’s generosity does however come with certain restrictions. Once invested the earliest you can access your investment is age 55 and even then you can only take 25% of its value as a (tax-free) lump sum. The rest has to be paid as an income which will be subject to income tax.
These have become less popular over the years compared to collectives because all returns are subject to a company life office tax of between 16% and 20% irrespective of the investors tax status, with higher rate payers subject to a further charge on top. These may still appeal to higher rate tax payers wanting to take an income from their investment as they can withdraw up to 5% each year and defer the tax calculation to a time in the future when they become a basic rate tax payer.
Offshore Investment Bonds
These will not be subject to tax whilst they remain outside the UK. However investors should remember that any gains are taxed at their marginal (highest) rate of income tax when they remit them back to the UK. The ability to assign all or part of these bonds to non-tax payers can make them attractive to investors wishing to make gifts to children or grandchildren.
Clearly there are a lot of considerations to make before deciding on the correct tax wrapper(s) for you, so seeking professional advice on this subject is essential if you want to keep the tax man out of your pockets.