High earners could use onshore and offshore bonds to alleviate new UK tax hikes, according to experts

News - Tax

Written by Ray Clancy

Thursday, 01 April 2010 08:28

Onshore and offshore investment bonds could provide an opportunity for high earners set to be hit by changes to the UK income tax regime this month, it is claimed.

Income tax changes that take effect on 6 April and affect high earners, especially those who receive an additional income from investment returns, are likely to mean people paying substantially more than the current top rate of 40%, according to experts at Aegon.

The removal of income tax personal allowance on income over £100,000 a year and the introduction of the 50% income tax rate for people earning over £150,000 a year have been well trailed. But also income tax personal allowances are being removed from 2010/11 onwards for people with taxable income over £100,000. The allowance for 2010/11 is £6,475, and those affected will pay a very high rate, equivalent to a rate of 60%, on income between £100,000 and £112,950, the life, pensions and investment firm points out.

According to Margaret Jago, technical manager at Aegon, onshore or offshore investment bonds can help reduce this 60% rate where someone’s overall income, including investment income, is within the range of £100,000 to £112,950.

‘These changes mean that bond investments will become particularly attractive to high earners. This is because there is no annual income tax liability on investments held in bonds. Personal income tax liabilities are deferred until a chargeable event gain arises. This will usually only happen when proceeds are taken from the bond, so the investor can control and delay the tax point and save tax as a result,’ she explained.

Gains on the bond will be taxed eventually but the investor can decide when to trigger the income tax liability on their bond and this means that they may be able to cash the bond in and pay tax when their tax liability is at 40% or lower, she added.

The company gives as an example someone earning £98,000 and with interest on bank deposits of £8,000. Their total income is over £100,000 so the effective tax rate will be 60% on the £6,000 excess. If that person puts the capital that generates the interest into a bond they have removed their annual income tax liability on investment income and at the same time have reduced their income back below £100,000 so back into the 40% tax bracket.

Also if this person’s income falls back to £80,000, perhaps because of a lower than expected bonus, then their highest tax rate would fall back to 40% and this rate would apply to their bond gains as long as these were under £20,000. This example shows that bonds can be particularly beneficial for people whose total income fluctuates, perhaps because they are self employed.

The other group that might be able to save income tax by using bonds are those with income over £150,000, including investment income, who will be 50% taxpayers from 6 April 2010. Again, the company claims, if bonds are not used, investment income will be taxed annually, and so tax will be due on this at 50%. But where savings are held in bonds, there will be no personal income tax liability until money is withdrawn.

‘This means the 50% rate can be avoided completely if proceeds from the bond aren’t cashed in until the investor is paying tax at lower rates, either because tax rates have fallen or the person is no longer a UK resident or has retired,’ added Jago.