News/Events

What the new tax year will bring and where money should be invested [17th April 08]

The Budget has come and gone and we are now in a new tax year. It never surprises me how many clients leave taking certain action until very close to the end when panic reigns. For example, we even had a client wanting to invest into a personal pension at 330 pm on Friday the 4^th –yes we did just manage it but it was hobson’s choice which was not ideal.

 So, I have the first rule for the new tax year and that is for anyone only wanting to invest into the cash portion of a 2008/2009 ISA, put in £3600 now and get the maximum tax free interest. In fact, everyone should invest £3600 regardless as under the new rules you can move the cash element to stocks and shares whenever you want as this facility has not been possible in the past.

Turning now to other matters and in particular, offshore investing which many people regard as only available to the seriously rich or a possible tax dodge. Well, this is a misconception as not only could this be a tax efficient way to invest, provide a wide choice of Investment funds but also give access to a number of investment options not available in the UK through the alternative “Onshore” products.

You can set up an offshore bond which could be linked to a plethora of investment and unit trust funds, open-ended investment companies (OEICs), hedge funds and even deposit accounts. I have just invested over £500,000 into an offshore Building Society account giving a net fixed rate for the year at 6.45% for an ultra cautious chap within his Self Invested Personal Pension Plan.

Apart from withholding tax on some assets, the tax liability does not arise until the bond is encashed and therefore gives flexibility as to when this tax liability could arise. The tax status of the bond owner at the time of encashment determines how much tax is paid and by whom. Additionally, an Investor can withdraw 5% per annum (this is cumulative) of the original investment for up to 20 years. If this figure is exceeded then there could be a liability and of course, by taking an income then this could reduce the underlying capital value.

Offshore bonds can be particularly attractive for anyone planning to move or retire abroad. There is then the opportunity to take the policy proceeds either in the new country of residence or in the UK before the Investor leaves. This gives a window of opportunity and to choose the country offering the lowest tax rate. Be warned, however, and seek specialist advice as each country’s tax system is different! We are lucky at Langtons as we have had a number of clients moving to Europe and our Chairman, Colin Langton, had the foresight to set up an office in Sotogrande in Southern Spain several years ago.

You can still reduce the tax liability by staying in the UK if you were a higher rate taxpayer when the bond was taken out and a basic rate tax payer when it is cashed in as higher rate tax is avoided or there is assignment to a lower tax payer e.g. a Son or a Daughter or a grandchild as most students don’t pay tax and the funds could help them through University.

On top of this there are possible IHT attractions as the bond could be written under an effective trust arrangement. In this instance, part of the investment, say, 50% could be out of your Estate immediately –subject to age and health- with the balance of the initial bond investment plus any growth being outside of your estate after 7 years. It should be noted that the bond value could go down as well as up and the final death value may be less than the amount invested.

This is obviously a specialist and complicated area so contact your IFA for advice and a general review.

This article was written by Langtons - Published in the Western Morning News, Money, 17th April 2008