Much is spoken about asset allocation within a portfolio, however the type of investment wrapper should be a priority to enable your investments to be as tax efficient for you as possible.
Tax wrapper planning checklist
1. Use your Pension Annual Allowance of £40,000 each year (be aware of the Money Purchase Annual Allowance, reduced Annual Allowance for high earners and the possibility of carrying forward any previous years unused Annual Allowance)
2. Use your ISA allowance of £15,240 (2016/17); £20,000 (2017/18)
3. Use the £5k dividend free allowance and CGT allowance within your General Investment Account (GIA) (or nominee portfolio)
Paying less tax will increase your investment gain potential. Therefore how much is the maximum you should have invested within a General Investment Account where you will not have to pay capital gains tax and dividend tax? The answer will vary depending on the investments held and risk level that you take, but is most likely to be around the £250,000 – £300,000 mark where with the right investments you can target around £5,000 in dividends (assuming you’re not using this allowance elsewhere) and therefore pay no tax. You can also realise enough investment gains to utilise your annual capital gains tax allowance (£11,100 in 2016/17). A General Investment Account can be a very tax efficient portfolio but only up to a limit.
But what next?
An investment portfolio held within an offshore bond wrapper could be the answer to ensure any investable assets over and above what is held within an ISA, Pension and GIA can be equally tax efficient. There are other benefits to an offshore bond too which can be tailored to your individual circumstances and needs. For example it could complement your existing retirement plans, protect your estate from inheritance tax, help with future plans to live/retire abroad or for funding school fees/university costs. An offshore bond is a very flexible wrapper providing tax efficiency, flexible investment choices, keeps the investor in full control and provides access to withdraw cash when needed.
The common misconceptions of offshore investing is that it’s just for the very wealthy or it is expensive and complicated. But it is simply just another investment wrapper set up by a life company in a jurisdiction with a favourable tax regime, such as the Isle of Man or Ireland.
A portfolio within an offshore bond benefits from growth that is largely free of tax (no or little tax on income/gains or CGT when switching investments) whilst any withdrawals are treated as ‘savings income’. Therefore if withdrawn by a non-tax payer, it can offset their personal allowance and the starting rate for savings band; that means up to £16,000 of gains without any personal liability to tax.
There is also the option to take up to 5% of the original investment annually where tax is deferred until the bond is ultimately encashed. You can also roll this forward, so if you do not make any withdrawals in year 1, then 10% is available in year 2 and so on. Then upon encashment; either partial or full; top slicing relief (proportioning the gain over the number of years the bond has been in force) can be used in order to reduce the tax payable where the total gain takes you into the higher or additional rate tax brackets.
For many years the perceived wisdom was that a pension was there to provide the main source of income in retirement, but in reality the wider use of a combined strategic tax wrapper approach to your wealth planning can be far more tax efficient. Having the flexibility to manipulate how and where your income is drawn from, enables you to benefit from income and capital gains tax personal allowances, annual exemptions and tax bands as they change from year to year, so that income can be amended up or down to ensure the optimum outcome. Therefore, not just enabling a more tax efficient approach in life but also when passing wealth to future generations.
Every individual is unique and their circumstances and objectives need to be assessed to find the most beneficial range of investment wrappers to suit them. If you feel you have maximised other wrappers available to you and want more tax efficiency or wish to review your inheritance tax position or consider how best to fund your retirement years, then seeking a full holistic review with a wealth planner should be high on your New Year priority list.