Higher Earners Briefcase
Higher Earners Briefcase
The challenge
- To avoid generating taxable income
- To maximise investment choice and potential
- To ensure flexibility for the future
The offshore bond solution
- Client has current earnings of £100,000, plus £200,000 to invest
- Will start to lose personal allowance if income goes above £100,000
- Invests £200,000 into Portfolio Account; wide choice of funds
- None of the investment return counts as income, whether from capital growth, dividends or interest
- Retains access to capital: can withdraw without adding to income and with no immediate tax if within 5% allowance
- If future earnings rise to £150,000, would avoid triggering 50% tax rate on investment return
- Could save tax at cash-in if then subject to a lower tax rate, no longer UK-resident or able to assign the bond to someone with a lower tax rate
What are the advantages?
- No income generated, therefore no loss of personal allowance
- Investment strategy not constrained by tax considerations; UK collective would incur high marginal tax on income - see the difference
- Open architecture - huge fund choice
- Preferential terms and annual management charge rebates on majority of funds
- Can switch between funds at any time, with the benefit of 10 free deals a year and no capital gains tax
- Added options: 5% tax-deferred withdrawals, assignment facility
Loss of personal allowance: marginal tax on collective income
Where the investment return from a UK collective includes interest or dividends, this will count towards the investor's annual income even if it is reinvested. This means it will be taxable year on year and, for higher earners, could affect the personal allowance.
Example
Annual earnings: £100,000
Investment: £200,000 in corporate bond OEICs
Net return (all interest): 5% a year
- Total income = £110,000
- £5,000 personal allowance is lost, incurring extra tax
-
Tax on £10,000 investment income:
£10,000 @ 40% = £4,000
£5,000 @ 40% = £2,000
Total = £6,000 - Marginal tax rate = 60%
The same corporate bond OEICs could be held in Portfolio Account, with the same return, but in this case it wouldn't count as income, so there is no loss of personal allowance and no tax to pay until there is a chargeable event.
Tools & calculators
Related links
- Find out more about Portfolio Account
- Request an appointment with your regional specialist
- Talk to our Technical Helpline on 08457 11 12 13
