So, for example, a client with a fully available annual CGT exemption and income £10,000 shy of the higher rate tax threshold and a capital gain of £51,300 would be taxed as follows:
So the total tax bill is £7,000 and the net return is £44,300.
But if the investment had been in an onshore bond with a gain of £45,500 say (to reflect the tax on the fund), the top-slice could easily fall into the basic rate band and the total tax bill be zero – so £45,500 net. A superior return.
Assumptions: £100,000 invested over 7 years, no withdrawals, collective investment growth rate of 6.1%, no income reinvested, onshore bond growth rate of 5.5%.
Horses for courses
Hopefully, this article has demonstrated that it would be wrong to adopt a broad-brush approach to product selection and proves that it is dependent on each individual client’s circumstances. In practice, it would probably be appropriate for clients to have holdings in a variety of tax wrappers. Then they could take advantage of whichever tax break is most appropriate – annual exemption, top-slicing or others – when they needed to cash-in investments.
Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland.
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