Why changes to Capital Gains Tax could make investment bonds an attractive option

In his autumn statement in September 2022 the chancellor, Jeremy Hunt, outlined some changes to Capital Gains Tax (CGT) that could affect your investment strategy and how you manage your investment income.

Read about the changes, how they could affect you, and some steps you could take to help ensure your investment income remains as tax-efficient as possible going forward.

The changes to CGT in April 2023

From 6 April 2023, the amount of profit you can take from your investments, or on the sale of other assets, before being liable for CGT will fall from £12,300 to £6,000.

Known as your “exempt amount”, this will then be reduced further to just £3,000 in April 2024.

This means that you could end up paying substantially more tax on your investment profit – especially if you’re a higher- or additional-rate taxpayer.

Changes to CGT in the next 2 tax years

	As of February 2023	From April 2023	From April 2024
Exempt amount	£12,300	£6,000	£3,000
Basic rate (non-property assets)	10%	10%	10%
Higher rate (non-property assets)	20%	20%	20%
Basic rate (property)	18%	18%	18%
Higher rate (property)	28%	28%	28%

 

If you’re used to maximising your CGT exempt amount each year to provide you with a tax-efficient income from your investment portfolio, the new rules are likely to make a significant difference to your strategy.

Investment bonds offer flexible income options

Given the changes announced, you could find investment bonds an attractive investment option, particularly as part of a wider income strategy.

One key advantage is that any investment gains you make through your bond are not subject to CGT.

Additionally, although you’re liable for Income Tax on withdrawals, a proportion of this can be deferred to a future date.

Each year, you can withdraw 5% of the original amount you invest in your bond with any Income Tax due being deferred for up to 20 years.

This facility can be especially helpful if you expect to fall into a lower tax band in the future – when you retire, for example.

What’s more, the annual 5% allowance is cumulative. This means that if you don’t use it in one year, it can be rolled over for use in future years.

Income Tax is only payable when there is a chargeable event

A key point to remember when considering the tax you could pay on an investment bond is that Income Tax only becomes due when there is a “chargeable event”.

One advantage of this is that it could allow you greater control over when tax will become payable, and who pays it, than if you were to hold the same investments directly rather than in a bond.

Chargeable events include:

• Full surrender of the bond
• The death of the final surviving bond holder
• Taking more than the 5% deferred tax allowance.

With regard to drawing excess income above the 5% limit, you’ll be liable for Income Tax at your marginal rate, less a 20% discount. For example, if your original bond investment was £200,000 and you wanted to draw £15,000, no immediate tax charge would be payable on the first £10,000.

If you’re a higher-rate taxpayer, you would pay 20% Income Tax on the balance of £5,000 once the discount had been applied.

The structure of bonds provides you with further added flexibility

Most investment bonds are set up as a series of identical segments rather than as a single entity. This makes them highly flexible if, for example, you want to assign part of your bond to someone else.

For further flexibility, it’s also possible for you to assign segments of your bond to other family members who may be liable for lower rates of Income Tax.

By assigning ownership of a certain number of segments, you avoid having to actually cash-in part of the bond, which would be seen as drawing income and, as a chargeable event, would be subject to an immediate tax charge.

If you assign segments of your bond to younger individuals, such as your children, you can effectively extend the term of the bond and defer the eventual payment of Income Tax due – even beyond your death.

As you may have gathered, the rules can be complicated to navigate so we strongly recommend that you speak to us first. We can help make sure you manage your bond in the most effective and appropriate way, according to your personal circumstances.

Aim to maximise your ISA allowance

As well as bonds, you should also consider other means of tax-efficient investment.

One of the most straightforward and popular tax wrappers is an ISA. Each individual, regardless of their income, can invest up to £20,000 in the 2022/23 tax year.

Any profit you make from your ISA investments is free from CGT. This means that you and your spouse or partner can invest up to £40,000 tax-efficiently every year, with no CGT liable when you want to draw from your funds.

Be aware that further changes to CGT could well be in the pipeline

In 2020, the then chancellor Rishi Sunak asked the Office of Tax Simplification (OTS) to review CGT, with particular reference to how the rules can distort investment behaviour.

The OTS report, published in November of that year, contained two major recommendations:

• CGT should be “more closely aligned” with Income Tax
• The uplift that allows inherited assets to remain free from CGT should be removed.

Neither of these recommendations have yet been enacted, nor any sign given of when they might be. But it’s fair to say that more changes may be on the way.

Given the ramifications these changes could have for how you manage your investment income, it’s important to ensure you’re investing for income as tax-efficiently as possible and carefully consider the advantages offered by investment bonds.

Get in touch 

If you need help or advice regarding any of the financial issues you’ve read about here, please get in touch.

Email info@lebc-aspira.com or call us on 01454 632 495.

Please note

The information contained in this article is based on the opinion of Aspira and does not constitute financial advice or a recommendation to any investment or retirement strategy.

You should seek independent financial advice before embarking on any course of action. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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