Tax Efficient Investment

A positive outcome of the last Budget was to increase the annual Individual Savings Account (ISA) allowance to £10,200 for the next tax year but with anyone aged over 50 allowed to take advantage of this increased allowance from 6 October 2009.

ISAs remain highly tax efficient being exempt from Capital Gains Tax and use of the annual allowance should be made in order to build up a tax efficient portfolio. Contributions can be temporarily invested in cash with higher rate tax payers effectively doubling their real return from cash within an ISA. The £10,200 can also be invested on a phased monthly basis to protect cash flow and to stagger investment in volatile times.

Tax efficiency of an investment is only one consideration and the following additional features apply to Life Assurance Investment Bonds:

- A higher rate taxpayer may draw down 5% of the original investment each year, for up to 20 years without any immediate tax liability.

- For retired investors the withdrawals will not affect entitlement to age allowance whereby extra personal tax allowance received from age 65 is reduced if annual income exceeds a certain level.

- Capital can be sheltered from Inheritance Tax where the Bond is wrapped under a Discounted Gift, Loan or Flexible Trust.

- Investments held under an Investment Bond are normally disregarded when assessing eligibility for Local Authority funding for long term care or residential care accommodation.

- When fully encashing a Bond, higher rate tax will potentially be liable on the gain. However, Bonds can be assigned to a basic rate taxpaying spouse or child in order to avoid this liability.

This is a complex area and the benefits of a holistic approach to investment remains essential, particularly, given the current economic climate. Please contact Lycetts if a review would be helpful or if you currently have monies to invest.