Investments

Investments are available in many different types; this is just a brief explanation of some of the main types of investments and how they are treated for tax purposes.

Equities/Direct Share Investment

Investing in individual shares can be very profitable, but it can also be very risky.  Shares are basically direct investments into individual companies, and the performance of the investment directly reflects the performance of the company.  Shares are subject to income tax on dividends received, with the first 10% of tax being non-reclaimable.  If you make a profit when you actually sell your shares, it may be liable to Capital Gains Tax, depending on the size and nature of the holding.

Collectives

Collectives come in many forms, and as the name suggests, they are basically a system whereby many investors can invest “collectively” in one investment which achieves diversification by investing in a wide number of shares. 

The most common types are; Open Ended Investment Companies (OEICS), or Investment Companies with Variable Capital (ICVC) and finally, Unit Trusts.

As with direct investment into shares, collective investments pay tax on the dividends they pay (income tax) and there may be a liability to Capital Gains Tax when the holdings are finally disposed of.

Investment Bonds

Investment Bonds used to be very common, but their popularity has somewhat diminished since the changes in the Capital Gains Tax rules were announced some years ago.

For the vast majority of investors, bonds are not generally suitable, because they pay tax within their structure and this tax is non-reclaimable.  The notional rate of tax paid within the bond is 20%.

Bonds invest in a similar way to collectives, but within a different product wrapper.

This is not to say that investment bonds do not still have their uses, they can be particularly attractive for Trustees who are investing on behalf of a Trust.  There is also an argument to use investment bonds for Inheritance Tax planning.

There is an offshore version of an investment bond available. Offshore bonds can have some tax advantages, particularly for higher rate income tax payers.

ISAs

ISAs come in many different types, but basically, you can invest in an ISA and have your money invested in either Cash, Stocks & Shares (generally collectives), or a mixture of the two.

The main attraction of ISAs is they have no liability to Income Tax on dividends (although the 10% tax credit is still non-reclaimable) and they are not generally liable to Capital Gains Tax.

For the Cash ISAs, the interest is generally tax free.

Deposit/Cash

There are a number of different types of deposit accounts, generally offered by  banks, building societies, national savings etc.  Cash is attractive in the sense that it guarantees the capital value of the deposit, and pays a regular rate of return which is predictable.

It is always important to monitor cash deposit levels in order to ensure you are protected from the potential default of the deposit account provider.

Please note that all of the investments mentioned above involve a degree of risk.  The value of all investments can fall as well as rise, and often the value of an investment is not guaranteed. 

All of the above narrative is based upon our current understanding of UK Inland Revenue practice, which is always subject to change in the future, sometimes these changes can be retrospective.

 

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