The tax treatment is dependent on individual circumstances and may be subject to change in future.
Tax planning and trusts are not regulated by the Financial Conduct Authority.
Different types of asset-backed investments include:
- Gilt-edged Securities (Gilts)
- Friendly Societies
- Unit Trusts
- Individual Savings Accounts (ISAs)
- Investment Trusts
- Open Ended Investment Companies (OEICs)
- Investment Bonds
Rates and allowances refer to 2023/24 tax year.
Shares are issued by companies who wish to raise money.
The best known shares are bought and sold daily on international Stock Markets. There are several different types of share but the most common are simply called 'ordinary shares'.
A shareholder will normally receive a dividend twice a year which is related to the profitability of the company. The board of directors decide how much the dividend will be in any given year. Dividends can be raised, lowered or stopped altogether, but past experience has shown that over the medium to long-term they tend to rise, thereby giving investors some protection against inflation, however this is not guaranteed.
In the short-term, share prices may fluctuate in response to changes in opinion about the company itself or the general outlook for business and the economy as a whole. However, in the medium to long-term, past experience has shown the tendency for share values to rise (ie. capital growth). This helps protect the real value of the investor’s capital against inflation.
Please note past performance is not a guide to future performance.
Selling shares may produce a capital gain for investors (ie. the value realised at the sale may be greater than the value at the time of purchase). A capital gain realised on the sale of shares is potentially liable to Capital Gains Tax.
Capital losses may be set against gains for tax purposes. Investing in individual shares can be risky and picking the wrong company could mean losing some or all of the original investment.
Investors may pay personal tax on income or gains unless the shares are held within an ISA or income is covered by allowances such as the dividend allowance or personal savings allowance.
* See below for tax treatment of dividends on shares.
Gilt-edged securities (Gilts)
Gilts represent borrowing by the Government and, therefore, have the highest degree of security.
An investor in Gilts will be guaranteed a fixed yield (or coupon) for the life of the stock. This is normally paid twice a year. Gilts can be purchased from the Bank of England or a stockbroker.
Gilts are traded daily and the market price fluctuates in response to market sentiment and current prevailing interest rates.
The price quoted shows the cost of purchasing stock that will be redeemed on the redemption date at £100 (the 'par value'). The market price is usually less than the £100 par value, but if the interest rate is very attractive compared to current prevailing interest rates it may be more than £100.
Most gilt-edged securities have a redemption date (or dates) at which time the Government guarantees to repay the investor the full par value of the stock held. The investor will make a capital gain if the market price paid for the stock was below par value. If the market price was greater than par value then there will be a capital loss.
There is no tax to pay on any capital gains made on Gilts.
Some Gilts are index-linked which means that the redemption values and the annual interest are increased in line with the Retail Prices Index. This protects the investor against inflation.
* See below for tax treatment of interest on Gilts.
Friendly Societies offer 10-year qualifying savings plans, which invest in cash deposits, managed funds or with profits funds. They are free of Capital Gains Tax and income tax.
The monthly limit for tax free status is £25, making a total contribution of £300pa. The maximum if paid by lump sum is £270.
Unit Trusts are pooled investment vehicles. This means relatively small sums from clients are pooled to form a large fund, which is able to invest in a broad spread of stocks and shares and other assets.
Investors’ interests are protected by the terms of a trust deed which must be approved by the Financial Conduct Authority before a unit trust is authorised to accept clients’ money.
Because they invest in stocks and shares, unit trusts must be viewed as medium to long-term investments. This means that they should be held for at least five years, preferably longer, in order that the investor can potentially benefit from capital growth and/or a rising income.
Unit trusts offer investors significant advantages. The fund can invest in a broad spread of stocks and shares which brings greater security than investments into an individual company's shares.
Each fund will benefit from the expertise of a professional fund manager who takes on the responsibility of the day to day investment decisions. Unit trusts offer a simple way of benefiting from an investment in the stock market. They avoid the complications and many of the risks associated with a person buying and selling individual stocks and shares.
Units can be easily bought and sold and the prices are published in the press. The price at which units can be purchased by individuals is called the offer price which is higher than the selling or bid price. The difference between the two is known as the bid-offer spread.
The prices of units are determined by the value of the assets in the fund. As the asset value rises or falls so do the offer and bid prices of units.
Income from assets owned by a unit trust is accumulated and regularly distributed to unit holders (normally twice a year) either as dividends or interest depending on the assets of the fund. Alternatively income may be re-invested by purchasing more units. Income, whether distributed or re-invested, is liable to income tax.
If, when units are sold, their value is greater than when they were purchased the investor will have made a capital gain. This is potentially liable to Capital Gains Tax if it exceeds the investor’s exemptions and reliefs.
* See below for tax treatment of dividends and interest on Unit Trusts.
Individual Savings Accounts (ISAs)
Available since April 1999, ISAs offer an attractive tax-efficient shelter to anyone aged 18 or over (16 or over for cash ISAs).
In 2023/24 individuals are able to invest up to £20,000 in total into ISAs. The investment could, if required, be shared between a cash ISA and a Stocks and Shares ISA (or other type of ISA) with transfers being allowed between the two.
For ISAs, Investors do not pay any personal tax on income or gains, but may pay unrecoverable tax on income from stocks and shares received by the ISA managers.
Although branded ‘trusts’, investment trusts are not subject to a trust deed like unit trusts are. However, they are a pooled investment.
Investment trusts are limited companies and their company directors are usually fund managers or investment experts. Their profit is made for their shareholders by buying and selling financial instruments, such as stocks and shares.
It is possible for shares in investment trusts to be ‘trading at a premium’ or ‘trading at a discount’ for example:
- shares in issue = 1 million.
- underlying asset values = £1 million.
- therefore each share is worth = £1.
This £1 is open to fluctuation due to influences and market sentiment just like stocks and shares. Therefore if the shares are trading at £0.95p they would be trading at a discount. If they were trading at £1.05p they would be trading at a premium.
Investment trusts are closed ended investments (unlike unit trusts which are open ended) and should they wish to acquire more investments than their share capital allows, they can benefit by ‘gearing’.
This simply means that they can borrow money to invest. Therefore a ‘highly geared’ investment trust would have large borrowings and could be considered high risk, especially in a falling (bear) market place.
All the tax implications for investment trusts are the same as shares as this is actually what the investor buys.
Open Ended Investment Companies (OEICs)
An OEIC could be considered a hybrid between a unit trust and an investment trust company.
The reason for their introduction into the UK (in 1997) is because they fall in line with their European counterparts, making the marketing of UK collective investments much easier and understandable both here and in Europe.
OEICs benefit from single pricing, rather than the UK’s traditional dual pricing (the bid-offer spread). They have the same buying and selling price with initial, exit and annual management charges expressed separately.
A guide to their basic structure is:
- They are investment companies.
- Like investment trusts, investors buy the company’s shares and benefit by the income and growth, or both, of the underlying shares they are trading in.
- The trading price of OEIC shares is based on the underlying asset value, like unit trusts.
- Like unit trusts they are open ended investments that can expand and contract to meet consumer demand.
OEICs can make distributions either by way of dividends or interest depending on the make-up of the fund.
*Tax Treatment of Gilts, Dividends on Shares, OEICs and Unit Trusts
Interest on all registered gilts is payable gross, without deduction of tax. A UK individual investor selling or otherwise transferring gilts may be liable to income tax on interest accrued up to the transfer, under the accrued income scheme.
For 2023/24 the first £1,000 you receive in dividends from investments is tax free. Above this, dividends falling in the basic rate tax band are taxed at 8.75%, in the higher rate tax band 33.75%, and in the additional rate tax band 39.35%.
Non-savings income (eg, salary, pensions, rental income) is normally allocated against your tax bands before savings, dividends and capital gains, so to find out at what rate interest on your savings is taxed, you must add this to your other taxable income.
Where an individual has dividend income in excess of the Dividend Allowance, this must be declared to HMRC in order that the appropriate tax can be paid.
Investment bonds are single premium life assurance policies. There is a high allocation to investment and relatively low life cover. They are pooled investments whereby relatively small amounts of individual investor’s money will be invested to create large pooled funds, maintained by a life assurance company.
Investments can be spread across a broad range of assets including property, shares, Government stocks and companies’ loan stocks, thereby reducing the risk for investors. It is, however, very important to realise that investment bonds are medium to long-term investments. As such they should not be considered for periods of less than five years.
There are two basic types of contract for investment bonds.
For the first of these (with-profits), the sum assured will be increased by bonuses related to the company’s profits.
For the second type of contract (unit-linked) the life assurance company maintains a number of underlying funds which are divided into units, the value of which is determined by the value of the assets in the fund.
The value of an investor’s investment will, therefore, be determined by the value of the units in the underlying fund and the amount of units that they hold. The funds may specialise in particular areas for example, property, shares, government securities, or they may cover some or all of these in a managed or mixed fund. Income and capital growth is accumulated within the funds.
With a UK investment bond (not an offshore bond) the tax on income and capital gains is ‘deemed’ to have already been paid within the product at basic rate by Her Majesty's Revenue and Customs. As long as their capital remains invested within an investment bond, investors will have no personal liability for either income tax or capital gains tax.
When money is withdrawn from a UK bond (for example, to provide income) or the bond is totally surrendered there will still be no liability for either basic rate income tax or capital gains tax (the fund has already paid these). If an individual is a higher rate tax payer at the time of withdrawal then additional tax may be become payable
However, the rules governing bond taxation are such that higher rate tax may be reduced or even avoided altogether with careful planning.
It is normally possible for investors to withdraw money from an investment bond, either on a regular or irregular basis, without bringing the bond to an end. This is important where income is a priority.
Up to 5% pa of the original investment can be withdrawn as a partial withdrawal (until such time as all of the original investment has been withdrawn in this way) without triggering an immediate tax charge (the tax assessment is deferred until the bond or segment is fully encashed).
Withdrawals can be made by surrendering part of a bond, but there can be adverse tax consequences for large withdrawals, and you should seek advice before making a partial surrender. However, some bonds divide the original investment into a number of small policies. In this case withdrawals can be made by totally surrendering some of these small policies. This may have certain tax advantages for the investor.
The value of your investment can go down as well as up and you may get back less than you invested. Tax concessions are not guaranteed and may change.
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