Category Archive Investments

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Offshore Investment Bonds

Offshore Bonds are collective investments in which the investments of many individual investors are pooled. They are technically single premium life assurance contracts and therefore normally have nominal life cover attaching, however they can also be written on a capital redemption basis without a life assured. A wide choice of funds is available ranging from managed to specialist funds.

A number of companies market offshore life policies, particularly single premium bonds. The most popular are those issued by subsidiaries of well known UK life offices in countries such as Luxembourg, the Republic of Ireland, the Channel Islands and the Isle of Man.

The income and gains of an offshore bond fund will normally be free of tax in the relevant jurisdiction. Hence they are often referred to as benefiting from “gross roll-up”.

Whilst there will normally be no tax in the particular tax haven that the insurer is based, the fund is likely to suffer some withholding taxes on its underlying investments. There may be scope to reclaim some of the tax under double taxation agreements but it is unlikely that an offshore fund with equity content will ever be truly gross.

The ability to defer tax is greater under an offshore bond than an onshore bond, therefore the longer it is held the greater the compounding effect of the tax deferment. All things being equal an offshore fund will create a greater return than an onshore one over the longer term. However, the greater the level of withholding tax and management expenses (an offshore fund has no tax from which it is able to deduct management expenses) the less an individual will benefit from gross roll-up.

To be eligible to invest in an investment bond, an individual investor must be 18 years of age or over. The investment can also be made on a joint basis, or by a company or trustee(s). The nominated life (lives) assured is usually the applicant/investor but could also be an individual aged under 18.

The minimum lump sum is usually £5,000 but this may be higher or lower depending on the provider. The maximum limit will be set by the provider.

Offshore bond gains are liable to tax and the rate will depend on the policyholder’s personal tax position. The personal allowance, the starting rate band for savings income and the personal savings allowance can all potentially be offset against offshore bond gains to receive some or all of the gains tax free.

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Onshore Investment Bonds

An investment bond is technically a single premium life assurance contract although the life cover aspect is only nominal.

Bonds are collective investments in which the investments of many individual investors are pooled. This pooling enables relatively small investors to benefit from the economies of scale made available to institutional fund managers.

A wide choice of managed, general and specialist funds are available offering investment opportunities in equity, property and fixed interest securities. Bonds enjoy the facility to switch between these internal insurance company funds at a reasonable cost if desired. Although classed as single premium investments, ‘top-up’ facilities are offered, allowing further amounts to be invested either on a regular or ad-hoc basis.

To be eligible to invest in an investment bond, an individual investor must be 18 years of age or over. The investment can also be made on a joint basis, or by a company or trustee(s). The nominated life (lives) assured is usually the applicant/investor but could also include an individual aged under 18.

The minimum lump sum is usually £5,000 but this may be higher or lower depending on the provider. The maximum limit will be set by the provider.

The underlying funds of Investment Bonds are subject to tax within the fund on income and gains (after indexation). Any ‘income’ you need is achieved by selling units.

Investors also benefit from the ‘5% rule’ which allows them to withdraw up to 5% of the initial premium each year (until such time as all of the original investment has been withdrawn) with no immediate personal tax liability, making it particularly attractive to higher and additional rate taxpayers.

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Structured Products

Structured products is the name given to a group of investments designed to deliver a known return for given investment circumstances and combine two or more underlying assets in order to offer growth or income potential, whilst usually offering some degree of capital protection.

Such investments normally share the following characteristics:

  • Fixed terms, meaning they are not as liquid as deposit accounts or investments in equities;
  • All of the return or interest only is linked to the performance of stock market indices;
  • Enhanced returns available because of the additional risk taken;
  • Growth or income options, or both, are available;
  • Can be held within a variety of product wrappers including ISAs;
  • Varying degrees of capital protection may be available; and
  • Offered only for a limited period and for a limited amount of funds.

A structured product can take two forms – a structured deposit and a structured investment. Structured deposits and structured investment products with some capital protection are often purchased by those looking for alternatives to saving accounts and other deposit-based products.

These products offers growth linked to stock market performance – usually via an Index, such as the FTSE 100 Index, although the amount of return you may receive is sometimes capped.

Some structured products expose your capital to risk, although these plans are often set up with a “safety net feature”, which means the stock market can fall by a certain percentage without affecting your capital return.

You should not invest in structured products if you might need access to your funds during the term of the product. If you do encash prior to maturity, heavy penalties will be incurred and you will receive back significantly less than you have invested.

There are no specific limits on the level of investment other than those that may apply to the wrapper (i.e. ISA or SIPP) for the investment. Also, providers may set their own minimum levels of investment per application.

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Investment Trusts

Investment trusts are a type of collective investment. They are structured as companies and exist purely to invest in a portfolio of shares and securities in other companies to make money for their own shareholders.

They pool investors’ money and employ a professional fund manager to invest in the shares of a wider range of companies than most people could practically invest in themselves. This way, even people with small amounts of money can gain exposure to a diversified and professionally run portfolio of shares, spreading the risk of stock market investment.

Investment trusts are what is known as closed-ended funds. This means that the amount of money which the trust raises to invest is fixed at the start by issuing a set number of shares to investing shareholders. Every selling shareholder must first be matched to a potential buyer via the stock market before a transaction can take place. Having a fixed pool of money enables the fund manager to plan ahead.

Trusts often specialise in particular sectors and types of company. Some might specialise, for example, in communications companies, or alternative energy producers. Others specialise in companies from different parts of the world.

Trusts also specialise in what they aim to give their shareholders. Some try and maximise income. Others aim exclusively for capital growth over the long term. Some trusts aim to provide a combination of income and capital growth. All trusts have investment objectives that will be clearly stated in their literature.

Investment trusts can borrow to purchase additional investments. This is called ‘financial gearing’. It allows investment trusts to take advantage of a favourable situation or a particularly attractive stock without having to sell existing investments. The idea is to make enough of a return on the investment to be able to pay the interest on the loan, repay it and then make a profit on top of that. Obviously, the more a trust borrows, the higher risk it’s taking – but the greater the potential returns.

To be eligible to invest in an investment trust, an individual investor must be 18 years of age or over. An investment can also be made by a company or trustee(s). The minimum monthly contribution is normally £100 and the minimum lump sum £500-£1,000. There is no maximum limit.

Most investment trusts allow shares to be sold at any time. You can make partial withdrawals or encash your full investment. The tax treatment is described above.

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GIAs, Unit Trusts and OEICs

General Investment Accounts (GIAs), Unit Trusts and Open-Ended Investment Companies (OEICs) are collective investment schemes which allow individuals to participate in a large portfolio of assets by pooling their money together with other investors.

This gives the individual access to a much wider spread of holdings than can normally be achieved with smaller sums of money, which in turn reduces the risk.

The fund is divided into units or shares, which are valued on a daily basis and reflect the underlying value of the fund. This value will fluctuate on a daily basis with market conditions.

GIAs, Unit Trusts and OEICs are a flexible and relatively cheap way to invest in the stock market. To be eligible to invest in a unit trust/OEIC, an investor must be 18 years of age or over. An investment can also be made by a company or trustee(s). The minimum monthly contribution is normally £25-£50 and the minimum lump sum is £500-£1,000; there is no maximum limit.

When a holding is surrendered, if there is a gain, this is subject to capital gains tax. However, each individual has an annual allowance, and as long as the gain together with any other gains you may have in the same tax year is less than the allowance, there is no tax to pay.

Any gain in excess of the annual allowance will be taxed at a rate of 10% if, after adding the net taxable gain to your taxable income in the relevant tax year, the total falls within the basic rate income tax band. A tax rate of 20% applies to gains or parts of gains which exceed the upper limit of the basic rate income tax band.

The majority of these types of investments can be sold at any time, however some assets such as property may have a notice period; you can make partial withdrawals or encash your full investment.

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Junior ISAs

Junior ISAs (JISAs) became available from 1st November 2011 and are the child equivalent of an ISA. Children can hold up to one cash and one stocks and shares JISA concurrently.

The qualifying investments for both cash and stocks and shares JISAs are the same as for the adult equivalents:

  • Stocks and shares – in the form of either individual shares or bonds, or pooled investments such as open-ended investment companies, unit trusts, investment trusts or life assurance investments; and
  • Cash – usually containing a bank or building society savings account.

All UK-resident children under the age of 18 who do not have a Child Trust Fund (CTF) are eligible for JISAs. This includes children born before the launch of the CTF (the CTF was available to children born between 1st September 2002 and 2nd January 2011). Anyone with parental responsibility for an eligible child can open a JISA for that child.

Eligible children will be able to open JISAs for themselves from age 16, and between ages 16 and 18, they can hold one of each type of JISA plus an ‘adult’ cash ISA. Previous years’ JISA subscriptions can be transferred in whole or in part subject to the child not having two accounts of the same type at the end of the transfer process.

Current years’ JISA subscriptions must be transferred in full. This means that part transfers of JISA investments can only be made to a JISA of a different type (cash or stocks and shares). A transfer from a cash JISA to another cash JISA or a stocks and shares JISA to another stocks and shares JISA must involve the transfer of the entire contents of the ‘old’ JISA. The end result must mean that the child still has no more than one of each type of JISA. Savings in Child Trust Funds can also be transferred to JISAs.

Any person or organisation can contribute to a child’s JISA. The overall contribution limit of a JISA is much less than an ‘adult’ ISA and is usually indexed annually by CPI.

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ISAs

Anyone, who is an income tax payer and has some money to save or invest should know about Individual Savings Accounts (ISAs). ISAs are wrappers within which a wide range of savings and investment products can be held, free of UK income and capital gains tax by anyone aged 18 or over (16 or over for cash ISAs).

ISAs serve as a ‘wrapper’ to fully protect savings from tax, allowing individuals to invest monies up to maximum limits (by way of regular or single amounts) each tax year in a range of savings and investments and pay no personal tax at all on the income and/or profits received. The main ISA benefits are:

  • No personal tax (income or capital gains) on any investments held within an ISA;
  • Income and gains from ISAs do not need to be included in tax returns; and
  • Money can be withdrawn from an ISA at any time without losing the tax breaks.

There are five types of ISA:

  • Stocks & Shares – in the form of either individual shares or bonds, or pooled investments such as open-ended investment funds, investment trusts or life assurance investments;
  • Cash – usually containing a bank or building society savings account;
  • Innovative Finance (IF-ISA) – in the form of loans made through peer-to-peer (P2P) platforms;
  • Lifetime (LISA) – for those aged between 18 and 40 designed to help them save up for their first home or retirement; and
  • Help to Buy – aimed at helping first-time buyers save for their mortgage deposit.

All of your annual allowance can be invested in either stocks & shares, cash, innovative finance ISAs or lifetime ISAs, or you can split it between more than one type, up to the overall annual limit of £20,000 with either the same or a different provider. However, the maximum annual amount you can save in a lifetime ISA is £4,000.

You are also able to transfer money saved in previous years’ cash ISA holdings to stocks & shares ISAs and vice versa without affecting your current year’s annual allowance. Innovative Finance ISAs cannot be transferred to other ISA wrappers, however it is possible to transfer existing ISA funds into IF-ISAs.

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New Tax Year Planning Pt. 2

In our second post about tax planning ahead of the new tax year, we look at income sharing, pension contributions, ISAs and Capital Gains.

Income Sharing

Always try and share income (if possible) between spouses, and so perhaps keep one or both of you out of 40% tax. Yes, we know this is not always possible, but for those who are self-employed, you should think about forming a partnership with your spouse, that would allow this.

Pension Contributions

Where you can afford it, try and maximise pension contributions. Bear in mind that you can put up to £40,000 into your pension every year, and equally where you haven’t used the previous three year’s allowances, you could put that into your pension too.

As you are potentially talking about paying up to £160,000 into your pension, then yes, you obviously need to be able to afford it. And whilst this money would be locked away until age 55 at the earliest, it would be less money to pay tax on now and mean a bigger pension upon retirement.

We had one client who through no fault of her own, received a salary which put her into the 45% tax bracket. Therefore, it was more than worth her while to put the excess amount which caused this, into her pension. You get tax relief at your highest rate of tax – and 45% relief is not to be snubbed! For every £1,000 that went into her pension, she only needed to pay £550, so that’s a bargain!

ISAs

Putting money into an ISA will reduce taxation, as there is no tax on dividends received, and ISAs will never be subject to Capital Gains Tax (CGT), no matter how much you encash later on.

Capital Gains

Everyone has an allowance of £11,700 which means you can make gains of £11,700 per year and pay no capital gains tax at all. This is one of those allowances with a ‘use it or lose it’ scenario, so if you are thinking about cashing in on something which would take you over this limit, and it is possible to cash in part of it this tax year and another part next tax year, you could make gains of £23,400 with no tax to pay at all.

This obviously may not always be possible, but can be done with investments and mean less of your gains are given away in tax.


If you would like to find out more information or would like to start investing today, please contact Money Advice & Planning Ltd on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.

Bymapfinancesadmin

New Tax Year Planning Pt. 1

In the first of two posts about tax planning, ahead of the new tax year, we look at how you can use salaries, dividends and pensions to maximise tax-free income.

Salaries

You may think this is a strange one to put in for tax planning, but it is an obvious one, and sometimes we all miss the obvious. The main thing to remember about personal allowances is use it or lose it – it’s that simple.

In the current year we get a personal allowance of £11,850 which is the amount we can earn without paying any tax. If you have your own company, and you or your spouse haven’t used your allowances for the year, it is worth thinking about taking an amount as a salary to use these allowances up. After all, if you don’t, it means some tax-free money has gone.

Dividends

As with the above, if you are a shareholder of your own company, think about taking £2,000 in dividends, as this would be tax-free. Please ensure however that you have profits of at least this amount, as dividends should only be taken out of net profits.

You should even look at the possibility of taking out more than £2,000 if the company can afford it, as dividends over £2,000 are taxed at 7.5% for those in the 20% tax bracket (a saving of 12.5%) and at 32.5% for those in the 40% tax bracket (a saving of 7.5%). The same warning as before still applies however; the company must be making equivalent profits.

Pension Income

If you are taking a pension income and your fund could stand you taking out more and this amount is available tax-free, i.e. by taking up to £11,850, then why not? You should always maximise the tax-free element – even if you extract it and put it in the bank – as at least you are not paying tax on it. Don’t forget this applies per person, so if you are married, your spouse can do the same.


If you would like to find out more information or would like help with any aspect of tax planning mentioned, please contact Money Advice & Planning Ltd on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.

Bymapfinancesadmin

Tax Planning for Spouses

Capital

As mentioned in a separate article in our January 2019 Professional Newsletter, as transfers between husband and wife are ignored for Capital Gains Tax (CGT) purposes, why not use this as much as you can to reduce a clients’ tax bill for any gains?

Pensions

Many a time when looking at a couple’s finances, everything seems to be done in the husband’s name and very little in the wife’s. If you are wanting to reduce long-term tax, this needs to change.

Let’s say all pension planning is done in the husband’s name alone, and he ends up with a pension of £60k p/year. This will obviously be well into 40% tax whereas, if it was done jointly and evenly, such that each party had £30k pensions p/year, only 20% tax would be payable. That represents a big tax saving and shouldn’t be ignored. Planning must be started early on to achieve this – and that’s where MAP comes in.

If you are doing accounts for a self-employed person, is it possible to do the same thing as a partnership, by introducing a wife into the planning? Perhaps through setting up a Limited Liability Partnership?

Inheritance

Every individual now gets £325k basic exemption from Inheritance Tax Planning (IHT), and then on top of this is the residence nil rate band which in due course will bring the exemptions up to £500k per person. The same applies with CGT – if assets were owned jointly, then maximum exemption could be obtained, and so significant savings on tax could be made.

A lot of these simple exemptions need a bit of planning as they just don’t happen overnight. Care has to be taken every step of the way to ensure compliance with the legislation, and that is what we do at MAP.

One of our IFAs is also a qualified accountant (and ex-Inland Revenue employee), who has many years’ experience as a financial adviser, and his work is all about planning. If he can help your clients, just let us know.

If you would like to find out more information or would like to start investing today, please contact Money Advice & Planning Ltd on 0345 241 1808 or e-mail us at enquiries@mapfinances.co.uk.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation. Money Advice & Planning Ltd is authorised and regulated by the Financial Conduct Authority.