Higher Rate Taxpayer Briefcase
Higher Rate Taxpayer Briefcase
The challenge
- To provide wide investment choice and cost-efficient switching
- To maximise investment potential
- To minimise the tax liability
The offshore bond solution
- Client, aged 57 and a higher rate taxpayer, invests £100,000 in Portfolio Account
- Chooses capital growth investments and actively switches the portfolio, earning a return of 6% a year net of charges
- Keeps the bond for 8 years - no tax liability on switches or investment growth and only withholding tax within funds
- Client retires and his income is now £40,000 a year, making him a basic rate taxpayer
- Cashes in the bond, making a gain before tax of £59,385
- Thanks to top-slicing, he pays only basic rate tax on the gain, giving a net cash-in value of £147,508 (based on tax allowances growing at an average 2.5% a year over the period)
What are the advantages?
- Top-slicing means he pays only basic rate tax on the gain - with a collective, he would have been pushed into the 28% bracket for capital gains tax - see why
- No tax (except withholding tax) during accumulation phase - see the difference
- No capital gains tax on switches between funds and 10 free deals every year
- Preferential terms and annual management charge rebates on majority of funds
- Open architecture - huge fund choice
- Added options - 5% tax-deferred withdrawals, assignment facility
Capital gains tax - the "performance tax trap"
In calculating capital gains tax (CGT), for example on the gain from a collective investment, the gain is added to the investor's income to determine the tax rate. This means that a basic rate taxpayer could pay the higher rate of CGT on part of the gain. The better the investment performance, the more likely this is to happen.
In contrast, an offshore bond will benefit from top-slicing, which can mean that all or most of the gain is taxed at basic rate.
Example
Investment: £100,000
Annual growth rate net of charges: 6%
Annual tax allowances growth rate: 2.5%
Cashed in after 8 years
Taxable income at cash-in (after personal allowance): £30,892 (£40,000 - £9,108)
| Collective | Offshore bond | |||
|---|---|---|---|---|
| Investment gain = | £ 59,385 | Investment gain = | £ 59,385 | |
| CGT allowance = | £ 12,915 | Top-sliced gain = | ||
| Net gain = | £ 46,470 | £59,385/8 = | £ 7,423 | |
| Taxable income = | £ 30,892 | |||
| Higher rate threshold = | £ 39,599 | Total income = | £ 38,315 | |
| Taxable income = | £ 30,892 | Higher rate threshold = | £ 39,599 | |
| Gain taxed at 18% = | £8,707 | |||
| Tax paid @ 18% = | £1,567 | Gain taxed at 20% = | £59,385 | |
| Tax paid @ 20% = | £11,877 | |||
| Gain taxed at 28% = | ||||
| £46,470 - £8,707 = | £37,763 | Net cash-in value = | £147,508 | |
| Tax paid @ 28% = | £10,574 | |||
| Total tax = | £12,141 | |||
| Net cash-in value = | £147,244 | |||
Tools & calculators
Related links
- See this in action - use our Collectives v bonds calculator to input your client's details
- See more examples in Tech's Message
- Find out more about Portfolio Account
- Request an appointment with your regional specialist
- Talk to our Technical Helpline on 08457 11 12 13
