If the slice sits in the basic rate band you have a basic rate liability, satisfied by the basic rate tax credit, so there is no further tax to pay. If it sits in the higher rate band then you pay up to 20 per cent more and the additional rate is 25 per cent more.
The table below looks at the overall return:
Non-dividend | Dividend | |
Gross return | £100 | £100 |
Tax within fund | 20% | 0% |
Net return | £80 | £100 |
Additional tax/net gain | ||
Basic rate | £0/£80 | £0/£100 |
Higher rate | £16/£64 | £20/£80 |
Additional rate | £20/£60 | £25/£75 |
Maximum tax rate overall | ||
Basic rate | 20% | 0% |
Higher rate | 36% | 20% |
Additional rate | 40% | 25% |
Overall higher and additional rate taxpayers benefit from the bond wrapper across all types of investment return, while basic rate taxpayers benefit when it comes to dividend returns.
Taxpayers at the higher rates over the investment term who are (or whose income arrangements could be organised to be) basic rate taxpayers when a chargeable event arises, benefit from a sub-20 per cent corporation tax with a personal tax exit of 0 per cent. This also applies for additional taxpayers dropping to higher, or even basic rate.
The wider planning benefits of bonds
While the tax advantages offered by bonds are what is driving their popularity, they offer wider planning benefits.
Bond holders are allowed to take 5 per cent of their original capital back each year without it causing a tax event.
This is called the tax deferred allowance and it allows people to supplement their income without it having a tax impact at the time. Instead, the withdrawals are taxed when the bond is encashed.
This can be useful for higher and additional rate taxpayers who wish to supplement their income now without a tax implication, knowing that they are likely to be in a lower tax position when the tax is eventually accounted for when they cash in the bond.
Many people will be planning to gift their investments to their family.
With a bond you can make a gift to someone without it giving rise to a tax event, whereas with a GIA gifting some or all of your portfolio will usually trigger a CGT event. If the gift is to be made into trust, bonds can be easier to manage as there is no need to account for any income.
Finally a word on the simplicity offered by bonds. When using a bond, advisers do not need to be concerned about an individual’s tax position when managing portfolios, as all of the buying and selling happens in the corporation tax world with no impact on the individual.
With the GIA, gains and losses need to be managed and sometimes tax paid, or loss relief claimed, all of which is not required in the bond as CGT rules do not apply.
