Investments & Tax

Famously Benjamin Franklin (1706-90) in 1789.

“In this world nothing can be said to be certain, except death and taxes.”

This can be traced further back to Daniel Defoe in 1726:

“Things as certain as death and taxes, can be more firmly believed."

Interestingly it was contained in a text entitled "The Political History of the Devil", implying that Her Majesty’s Revenue & Customs were no more loved then than now!

But although taxation is a major consideration in planning investments, it rarely makes sense to invest purely for taxation reasons. A 10% loss with 40% tax relief, is still a net loss of 6%!

Three taxes typically interact with investment planning:

• Income Tax
• Capital Gains Tax
• Inheritance Tax

It is possible to invest to take advantage of differing tax regimes. For most investors £100,000 in a Unit Trust portfolio makes more sense than UK investment bonds for the same amount. Unit Trusts are not subject to tax within the fund, but UK investment bonds pay about 18% on investment return. Assuming 7% gross annual return, a UK bond rather than Unit Trusts could cost £1,260 a year in tax!

Unit Trusts are subject to Capital Gains Tax assessment on gains taken, but most investors don’t use their annual CGT exemption anyway and would benefit from tax free returns.

UK Investment Bonds have their attractions as do Offshore Bonds, but only if used to take advantage of the tax profile, rather than suffer from it!