Techzone

The tax year end is an opportunity for clients to boost their savings by making the most of annual tax breaks. Any allowances that would otherwise remain unused, such as the CGT exemption or personal allowance, are a chance to take investment profits 'tax free' from OEICs and bonds. If not used in this way by the 6th April, they will be lost forever.

This years' CGT allowance of £11,300 could save a higher rate taxpayer £2,260. Put another way, failure to use it could ultimately cost them £2,260. And allowing gains to accumulate could cost similar amounts each year they do not use their allowance. So even though a client may not need the proceeds, taking the gains may still be the rational thing to do.

Taking bond gains tax free may be slightly trickier, as gains are subject to income tax, which means to benefit from a 0% rate requires a client to have low income levels. If your client is not this person, then an assignment to someone who is, such as a spouse, may be an option.

The re-investment options

Having taken profits tax free, consideration then needs to be given towards re-investment of the proceeds. SIPPs and ISAs are the most tax efficient for those who have scope. Both have automatic protection from income tax and capital gains tax on funds invested.

In contrast, a personal portfolio of OEICs/unit trusts are not protected. Income in excess of the dividend allowance will be taxed when it arises, and there is a greater possibility of this next year when the allowance drops to £2,000. And capital gains will be taxed if they exceed the annual CGT allowance, currently £11,300.

Offshore bonds do protect funds from further tax during the investment period, but unlike ISAs, this is only a deferral of tax.

Remember that clients holding onshore bonds will always be suffering some tax on their investment returns. Credit is given at basic rate on these plans on surrender to reflect the tax already deducted. So while funds cannot be extracted tax free using allowances there may be no further liability provided the top sliced gain doesn't push clients into higher rate tax.

Why SIPPs and ISAs?

Given that offshore bonds and a personal portfolio of OEICs have the potential to be taxed, then ISAs are a logical choice for the certainty they offer (ignoring charges), provided clients have enough subscription limit available.

But put ISAs in a head to head with SIPP, and if retirement saving is the goal, it is the special tax treatment of SIPPs that normally wins the day.

Consider a lump sum of £20k allocated for saving by a higher rate taxpayer, who will be a basic rate taxpayer when they take their money. Ignoring growth (as investment growth is taxed in the same way under both SIPP and ISA), the outcome is:

As there is no further tax on investments held within ISA or SIPP, the 41% difference is purely down to the tax treatment of the SIPP. Specifically that a higher rate taxpayer gets 40% tax relief on money saved into a SIPP, and when money is withdrawn, 25% is tax free. And this also works for a client who will always be a basic taxpayer, who would see a return after tax of £21,250. A little more complicated maybe compared to an ISA which simply protects investments from tax, but only a little!

Clearly a tax year-end review of allowances still available and using them to take profits and recycle into the best available tax wrapper year on year can really make a client's lifetime savings work harder. The following example shows how this may look:

The family unit

As already touched on, a client may also wish to make the most of any unused allowances of their partner.

OEICs / unit trusts can be transferred to a spouse or civil partner without any tax so that partner can cash in using their own annual CGT allowance.

The same can be achieved with the assignment of bonds as 'gifts' are not chargeable events.

Summary

Making the most of the annual tax breaks on offer is a great way to demonstrate the value of advice. The amount of tax saved can be measured, and while these savings may seem relatively small, if done every year can make a significant difference to savings.