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Budget 2008 confirmed the changes to Capital Gains Tax (CGT) for mutual funds announced in the Pre-Budget report. The changes announced see the introduction of a flat rate of 18% tax on capital gains, with the removal of indexation allowance and taper relief.
As Tim Rees, head of financial planning at Clerical Medical puts it: "There are winners and losers to the Capital Gains Tax changes. In the mutual funds versus investment bonds debate Clerical Medical believes that when the tax efficiency, relative product costs and administrative simplicity are compared, financial advisers will continue to recommend investment bonds."
The investment firm offers a six point case for investment bonds:
1- Control of the tax point: In a bond no personal tax is paid until a 'chargeable event' occurs, for example, cashing in the investment bond, which can be useful for an investor who is a higher rate taxpayer when they invest, but likely to become a basic rate taxpayer later, for example in retirement. If an onshore bond is cashed in when the investor is a basic rate taxpayer they will have no further tax to pay on the income and gains.
2- Defer higher rate tax on income: The tax rates on income received by a fund for bonds and Open Ended Investment Companies (OEIC) are broadly neutral. However, higher rate taxpayers investing in bonds have the considerable advantage in that they can defer the higher rate tax on their investment until a chosen time in the future. An investor in an OEIC must pay the higher rate tax on any income whether it is accumulated or not.
3- Switch funds without triggering a tax charge for the investor: A bond allows the investor to switch between funds without triggering a personal tax charge. In an OEIC this will usually be a disposal for CGT purposes.
Bonds can be given away without triggering a tax charge. With an OEIC this would normally be a disposal for CGT purposes. This can be particularly useful for making gifts into trust as part of inheritance tax planning, and for parents investing for university funding.
4- Bonds as trustee investments: Bonds can be very convenient for trustee investments. They are classed as non-income producing assets and so for many trusts, they can save a great deal of trustee administration and costs.
5- Bonds allow up to 5% a year to be withdrawn without triggering an immediate tax charge. This allowance is cumulative so if no withdrawals are made in year 1, 10% can be withdrawn in year 2. The allowance continues for twenty years.
6- Customer example - investment bond: Mr Jones, 50, is a higher rate taxpayer but is likely to be a basic rate taxpayer in retirement. He is looking to invest £100,000 for the medium to longer term, to supplement his retirement income, in a cautious portfolio of assets.
By investing in a bond he will not pay any personal tax on income or capital gains arising until he encashes when in retirement. Assuming that he is then a basic rate tax payer, he will have paid a maximum of 20% on all income and gains accumulated in the fund.
19 March 2008 © Moneyextra.com
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