Tax wrapper choice is now more important than asset allocation when it comes to investment planning, according to James Hay Partnership’s head of technical support.
Speaking to FTAdviser, Neil MacGillivray argued the right assets in the right wrappers can enhance returns “quite considerably”, compared with those in the wrong wrapper.
Traditionally people would have pensions, Isas and capital gains tax exemptions alongside dividend allowance, plus now there is the personal savings allowance, which constitutes £1,000 of gross interest if you are a basic rate tax payer, to save into.
Mr MacGillivray added that after all these vehicles and applications, for high net worth individuals what is left is growth versus income, or bonds versus collectives.
With capital gains tax down to 20 per cent, for higher and additional rate tax payers, it’s better going for capital growth than income.
“I’ve looked at the issue of bonds versus collectives and broken it down into three parts, where it’s interest, dividends and capital growth, and again it clearly shows capital growth is better in the hands of the individual than at the hands of an offshore, rather than an onshore, bond,” he stated.
“Interest bonds perform slightly better over someone holding it directly, but when it comes to dividends, onshore bonds [do], so there’s actually an argument in there about what the impact that will have on the offshore bond market, because a lot of their market will now not be as attractive as they were.
As a result, platforms will be the winners, because they are providing the different tax wrappers, Mr MacGillivray commented.
Growth versus income
| Net gain/income on £1,000 after all allowances and exemptions used | Basic rate | Higher rate | Additional rate |
| Interest | £800 | £600 | £550 |
| Dividend | £925 | £675 | £619 |
| Gain | £900 | £800 | £800 |
Source: James Hay Partnership
Bonds versus collectives
| Tax within fund | Collective | Onshore Bond | Offshore Bond |
| Interest | 20% | 20% | 0% |
| Dividends | 0% | 0% | 0% |
| Gains | 0% | <20% | 0% |
Colin Rodger, director at Edinburgh and Glasgow-based Alexander Sloan Financial Planning, said this illustrates the complicated tax treatment of investment income and gains.
“It shows the importance for advisers of having a range of tax wrappers at their disposal,” he said.
“Platforms can provide a solution both in terms of being able to help advisers arrange investments into the most appropriate tax wrappers ‘under the one roof’, but also to administer the investments.”
ruth.gillbe@ft.com
