Autumn statement expands customer base for investment bonds
Tax efficiency entry points for considering investment bonds will be ‘materially lower’ in 2023/24
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Autumn statement expands customer base for investment bonds
By Mark Lambert, Head of Onshore Bond Distribution, HSBC Life
Autumn Statement changes to income tax thresholds, Capital Gains Tax and dividend taxation (taking effect from 6th April 2023) will expand the potential customer base for UK and offshore bonds, according to new analysis by Technical Connection Ltd, a leading tax and trust consultancy business published on their Techlink knowledge management platform.
The combined impact of the measures means investment bonds may even become relevant to some basic rate taxpayers as a tax deferment and tax management vehicle.
HSBC Life, an advocate of the importance of investment wrapper selection, believes the adviser’s role has become even more critical to help clients make the right decisions about whether to invest in unwrapped collectives or UK and offshore investment bonds once the opportunities for investing in ISAs and pensions have been fully considered.
While the Autumn Statement changes do not change the tax fundamentals of decision making in relation to collectives and both types of investment bonds, it will have a material impact on the level at which bonds should be considered as tax deferment or tax management vehicles in comparison with collectives.
Three things need to be factored into investment wrapper choice: the reduced threshold of additional rate tax, the frozen personal allowance and higher rate tax threshold, as well as higher rates of dividend tax. However, it’s the 50% p.a reductions (over the next two tax years) to the Capital Gains Tax annual exemption, plus the Dividend Allowance that have lowered the monetary investment point for bonds to be considered for their tax deferment and tax management qualities, according to the Technical Connection analysis.
HSBC Life believes that that investment bonds could also have an administrative advantage over collectives, in terms of the need for Self-Assessment reporting even if they incur slightly more tax. HMRC estimates issued after the Autumn Statement say that 260,000 individuals and trusts could be brought into the scope of Capital Gains Tax for the first time.
Mark Lambert, Head of Onshore Bond Distribution at HSBC Life (UK) Limited, said: “In theory, the bar above which investment bonds could be considered for tax efficiency will fall by about 50% in 2023/24 and by a further 50% in 2025/26. The entry point for considering bonds will be materially lower for all taxpayers.”
UK bonds offer zero tax on dividends at a policyholder level while non-dividend income is taxed at 20%. Capital gains are taxed at 20% while top slicing relief and 5% tax deferred rules remain. Lifetime transfers by way of assignment are not taxable events and basic rate tax credit in determining policyholder tax on realised chargeable gains continue.