It is important to put these factors aside and look objectively at the benefits onshore bonds can provide. They are a valuable planning tool and a good addition to a professional adviser’s portfolio of investment solutions.
The desire for transparency over recent years has led many bond providers, such as Canada Life, to adopt a simple charging structure allowing clients to see clearly what they are paying and to whom.
Platform providers now also provide transparent unbundled charges too.
The new transparent world makes it much easier for advisers and clients to compare the cost of different tax wrappers.
The Select Account uses a single tiered product charge based on the value of the investment, similar to some platform providers. So, for example, a £250,000 investment has a monthly charge equal to just over £900 a year, or 0.36% of the investment. This is very competitive when compared to buying a collective on some platforms, where the annual platform charge can go up to 0.50% or even higher.
Internal tax
With onshore bonds the gains and income achieved by the underlying life fund is subject to tax, paid by the provider and, whilst some may consider this a disadvantage, it can be very beneficial as it allows personal tax to be deferred. This can actually help an investor pay less tax overall which is not necessarily a bad thing.
To understand this, the tax paid within the fund is as follows:
- Any interest and rental income received by the provider is subject to corporation tax at 20% although any UK dividend income received is not taxed.
- Any realised capital gains are also subject to corporation tax of 20% and for equities, equity-based investments and gilts, this is after indexation relief in line with the retail prices index. There is no indexation for other fixed interest holdings.
- In addition to this for certain holdings such as equity-based unit trusts and OEICs, each year it is deemed to have disposed of the holding and reacquired it at the market value. These gains and losses can be spread over a seven year period.
From an investor’s perspective, this tax is deemed equal to basic rate tax, despite the fact that the actual tax paid is generally lower than 20%. It could potentially be a lot less, depending on investment performance and economic conditions.
Personal tax for your client
