In his recent Budget, Alistair Darling announced a 50% rate of income tax for those earning over £150,000 to come into effect at the beginning of the new tax year in April 2010.
As many of us dream of having such a high level of income, we may feel that this will not affect us. Sadly, this new rate of tax may affect more people than we expected.
The new 50% rate of tax will apply to many trusts, including those with relatively small amounts of income. This means that it may catch people who have set funds aside for children or grandchildren, as well as those who may have left money in a trust in a will.
However, it may be possible to avoid the tax.
There are many types of investment products, each taxed in different ways. Therefore, trustees and beneficiaries of trusts may seek investments not taxed so highly such as an investment bond.
Investment bonds suffer tax within the policy itself. Investors benefit from returns in such assets as cash, property and stocks and shares, all within the investment bond. As the policy provider pays tax on the fund directly to HM Revenue & Customs (HMRC) which satisfies a basic-rate tax liability, the bonds are easy to administer. If the policy provider is offshore, the rate of tax is much lower. The life assurance company running the investment bond can offset the costs of running the policy against the growth within the fund. As a result, the effective rate of tax within the bond can be even less than the deemed basic rate for UK bonds of 20% which will appear very attractive to anyone suffering tax at 50%.
Clearly, investment bonds will not be the best investment in all cases, as some bonds can be very expensive, so it is important to get as much advice in advance as possible to ensure you are making the right choice.
A blog providing UK tax information and planning ideas from John Pointon, Accountant, Business and Tax Consultant. Please send any suggestions for topics you would like to see covered to me at jpointon@gmail.com or 34 Lightley Court, Sandbach, Cheshire, CW11 4QA or phone 01270 763 466.
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