From ISAs to OEICs and investment bonds, how to get tax free income and growth through a well managed portfolio.

Individual Savings Accounts (ISAs)

ISAs allow you to save money tax-free, however the amount of money you can save into ISAs is currently limited to £20,000 per annum.  Cash ISAs receive interest and the returns from investment based stocks and shares ISAs vary depending on the funds you are invested in.

New for 2017 is the introduction of the Lifetime ISA's, for anyone aged under 40.  You can save up to £4,000 of your £20,000 annual ISA allowance, and receive basic rate tax relief on any amount invested.  As long as the account is open before age 40, you can carry on and contribute to a Lifetime ISA until age 60 and continue to receive basic rate tax relief. However, you can only access your Lifetime ISA to either help fund a property purchase or after age 60.  Access for any other reason before age 60 will result in the loss of the tax relief you have received.

Junior ISAs are available for children aged under 18, who do not have a Child Trust Fund. Anyone can pay into a Junior ISA on behalf of the child, currently up to £4,128 per annum. Although Junior ISAs are held in the name of the child, they cannot be accessed until the child reaches the age of 18.

General Investment Accounts (GIAs)

GIAs allow you to invest in Unit Trusts and Open Ended Investment Companies (OEICs), however unlike ISAs, investing through a GIA does not provide tax-free returns.

The income, usually by way of dividends, may be subject to income tax regardless of whether you receive the income or it is reinvested to purchase more units, known as ‘accumulation’. When you ultimately sell the fund, any investment gain may be subject to capital gains tax.

There are however various tax allowances. Currently, the first £5,000 of dividend income per annum, (however this is being reduced to £2,000 per annum from 6 April 2018) and the first £11,300 of capital gain per annum is tax-free. This may mean that income and capital growth from investing within a GIA is also tax-free, if properly managed.

Investment Bonds

Investment bonds are a single premium lump sum investment into a non-qualifying life insurance policy, typically used for investing.  Investment bonds are also a non-income producing investment, therefore are useful for clients trying to control their level of income for tax planning reasons.

It is possible to receive a tax deferred income from an investment bond, and some investment bonds also have some optional unique features such as a capital guarantee or a death benefit guarantee. Bonds can also be assigned into a variety of Trusts, which is useful for inheritance tax and estate planning.

The taxation of bonds is a complicated area and we strongly recommend that you seek advice before encashment to ensure that you minimise any tax liability.

Case Study – Meet Mary and Paul

Mary and Paul are retired and have £600,000 invested in bank based cash savings as a result of selling a second property several years ago.  Mary and Paul were historically receiving 4% interest on their savings, but this has decreased over time to less than 1% today, and they need more income to meet their needs.

Of the £600,000, approximately £176,000 is invested in cash ISAs, however as neither Mary nor Paul had invested in ISAs in the current tax year, both of their annual ISA allowances were available.

We recommended that the cash ISAs were transferred into investment based stocks and shares ISAs, and topped up in order to utilise both of their ISA allowances for the current tax year.  The ISAs were then invested in a portfolio of funds based on the level of risk that they were happy to take.

Next we recommended that £112,000 should be invested in two separate General Investment Accounts (GIAs), each with a target to generate income by way of dividends in order to utilise each of their tax-free dividend allowances.  Any additional withdrawals would be from capital, which would be taxed to capital gains tax and tax-free provided that they are less than £11,300 per annum.

Finally, £200,000 was invested in a joint life investment bond, from which they received a tax deferred income of 5% of the original investment premium per annum, payable for 20 years.