Personal Tax and Trusts

Personal Tax and Trusts

Onshore Investment Bonds

Investment bonds have a different tax treatment from other investments. This can lead to some valuable tax planning opportunities for individuals.

There is no personal liability to capital gains tax or basic rate income tax on proceeds from your bonds. This is because the fund itself is subject to tax, equivalent to basic rate tax.

You can withdraw up to 5% each year of the amount you have paid into your bond without paying any immediate tax on it. This allowance is cumulative so any unused part of this 5% limit can be carried forward to future years (although the total cannot be greater than 100% of the amount paid in).

If you are a higher or additional rate taxpayer now but know that you will become a basic rate taxpayer later (perhaps when you retire for example) then you might consider deferring any withdrawal from the bond (in excess of the accumulated 5% allowances) until that time. If you do this, you will not need to pay tax on any gains from your bond.

Onshore Investment Bond considerations

Certain events during the lifetime of your bond may trigger a potential income tax liability:

  • Death
  • Some transfers of legal ownership of part or all of the bond.
  • On the maturity of the bond (except whole of life policies).
  • On full or final cashing in of your bond.
  • If you withdraw more than the cumulative 5% annual allowance. Tax liability is calculated on the amount withdrawn above the 5%.
  • If you are a higher or additional rate taxpayer or the profit (gain) from your bond takes you into a higher or additional rate tax position as a result of any of the above events then you may have an income tax liability.

As you are presumed to have paid basic rate tax, the amount you would be liable for is the difference between the basic rate and higher or additional rate tax.

The events may also affect your eligibility for certain tax credits.

Life assurance bonds held by uk corporate bonds fall under different legislation. Corporate investors cannot withdraw 5% of their investment and defer the tax on this until the bond ends.

Offshore Investment Bonds

Offshore investment bonds are similar to UK investment bonds above but there is one main difference. With an onshore bond tax is payable on gains made by the underlying investment, whereas with an offshore bond no income or capital gains tax is payable on the underlying investment. However, there may be an element of withholding tax that cannot be recovered.

The lack of tax on the underlying investment means that potentially it can grow faster than one that is taxed. Note that tax may be payable on a chargeable event at a basic, higher or additional rate tax as appropriate.

Remember that the value of your fund for both onshore and offshore bonds can fluctuate and you may not get back your original investment.

Offshore is a common term that is used to describe a range of locations where companies can offer customers growth on their funds that is largely free from tax. This includes “true offshore” locations such as the channel islands and isle of man, and other locations such as Dublin. Tax treatment can vary from one type of investment to another and from one market to another.

UK Shares and Taxation

If you own shares directly in a company you may be liable to tax In tax year 2018/19 you have a Dividend allowance of £2,000.

Sales of Shares

When you sell shares you may be liable to capital gains tax on any gains you may make. You have a yearly allowance, above which any gains are liable to 18% tax. Special rules apply to working out your gains or losses.

Make the most of your Personal Income Allowances

For the tax year 2018/19;

  • Personal tax allowance of £11,850
  • Personal allowance income limit £100,000
  • Dividend allowance £2,000

Capital Gains Tax rates

Everyone can make up to a certain amount of profit each year from selling an investment or property without paying tax. Think about switching investments to a spouse’s or civil partner’s name to take advantage of both of your allowances.

You pay a different rate of tax on gains from residential property than you do on other assets.

You don not usually pay Capital Gains Tax when you sell your main residence.

If you pay Higher Rate Income Tax

If you are a higher or additional rate taxpayer you will pay;

  • 28% on your gains from investment property
  • 20% on your gains from other chargeable assets

If you pay Basic Rate Income Tax

If you are a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

  1. Work out how much taxable income you have.

  2. Work out your total taxable gains.

  3. Deduct your tax-free allowance from your total taxable gains.

  4. Add this amount to your taxable income.

  5. If this amount is within the basic Income Tax Band you’ll pay 10% on your gains, or 18% on residential property. You will pay 20% on gains (or 28% on residential property) on any amount above this.

Example

Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,300. Your gains aren’t from residential property.

First, deduct the tax-free allowance from your taxable gain. For the 2018 to 2019 tax year the allowance is £11,850, which leaves £450 to pay tax on.

Add this to your taxable income. Because the combined amount of £20,450 is less than £33,500 (the basic rate band for the 2018 to 2019 tax year), you pay Capital Gains Tax at 10%.

This means you’ll pay £45 in Capital Gains Tax.

If you have gains from both residential property and other assets.

You can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).

If you are a Trustee or Business

Trustees personal representatives of someone who’s died must pay:

  • 28% on residential property
  • 20% on other chargeable assets

You will pay 10% if you’re a sole trader or partnership and your gains qualify for Entrepreneurs’ Relief.

Types of Trust

Bare Trusts

With a bare trust each beneficiary has an immediate right to both capital and income.

Interest in Possession Trusts

With interest in possession trusts, beneficiaries have a right to all trust income

Discretionary or Accumulation Trusts

Discretionary trust trustees choose whether to pay out trust income, accumulation trust trustees re-invest income

Mixed Trusts

Mixed trusts combine different types of trusts

Settlor Interested trusts

The ‘settlor’ who puts assets into a trust can continue to benefit from those assets

Parental Trusts for Children

Special tax rules for trusts set up by parents for unmarried children below the age of 18

Non-Resident Trusts

UK trusts may be set up or managed by people living abroad

Trusts for Vulnerable People

Special tax rules for trusts set up for disabled people or children who have lost a parent

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

The Financial Conduct Authority does not regulate taxation and Trust Advice.