What are the tax implications?

The tax implications for your investment will be dependent on what type of wrapper you use.

Collectives (Unit Trusts and OEICS)

Within a Collective wrapper any sale of units/shares, including fund switches, will be deemed a disposal for Capital Gains Tax (CGT) purposes and may incur a tax charge dependent on the level of any other gains you have in that tax year.

Dividends arising within a collective wrapper have a non-refundable 10% tax credit that will satisfy a basic rate taxpayer’s income tax liability in full. You may however be liable to pay additional income tax at a higher rate dependent on your levels of personal income. Each year you should receive a consolidated tax voucher from your wrapper provider giving details of tax deducted on income received within the account during the preceding year.

ISAs, Pensions and Investment Bonds

For ISAs, Pensions, Onshore Investment Bond and Offshore Investment Bond wrappers there is no personal liability to capital gains tax on either fund switches or final encashment of your investment.

Pensions and ISA’s grow virtually free of any income tax liability however there are restrictions on the amount you can withdraw tax-free from a pension at retirement.

With Onshore Investment Bonds there is a company life office tax of between 16% and 20% which has already been allowed for in the published unit prices for these funds. This tax cannot be reclaimed by non tax payers. There will only be any further income tax liability if the onshore Investment Bond holder is a higher rate tax payer in the year of encashment. An income tax liability may also be triggered if the gain on the policy, when added to their income, makes them a higher rate tax payer. However this can sometimes be avoided by dividing the gain by the number of years the investment has been held (known as top-slicing).

With Offshore Investment Bonds there is no immediate liability to income tax whilst the investment remains offshore. However on repatriation to the UK any gains on the investment will be subject to income tax at the investor’s marginal (highest) rate. As with Onshore Investment Bonds top slicing can be used to potentially avoid any higher rate income tax liability.