Guaranteed Equity Bonds - tax question


T

tombo

Hi, just a quick one.

1) I'm told that the income on equity bonds (say, paying 130% of FTSE100
gains over five years) is subject to income tax. Is that correct? I'm no
expert (at all) but I'd have thought it would be capital gains.

2) Is there any legal way to avoid the tax? The five year term is quite
long, so are there any wrappers available (ISAs, pensions, life insurance
etc).

Cheers, Tombo.
 
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S

sylvian stone

The answer is - you MAY you subject to income tax. Investment Bonds are
technically written as Life Insurance policies (the life insurance
element is minimial - usually 101% of the investment value), so CGT
does not apply. However, if you buy a second-hand policy, and are not
the life assured, CGT may come into the equation (but this is kinda
getting off the point)....

Under current rules, you can withdraw 5% of the original investment
each year (or roll this up for future years) and defer any tax until
you encash the bond.

Do a google search for 'investment bond chargeable events' & 'top
slicing' to read up on how the gain and subsequent tax is calculated.
Bascially, work out the gain, take into account any withdrawals +
chargeable events, and divide by the number of years the bond has been
in force. Then add this amount to your income for the tax year in
question.

If you are a basic rate taxpayer, you will probably pay no additional
income tax, because the underlying investments within the bond have
already been taxed. However, if you are a higher rate taxpayer, there
could be an additional 18% charge (higher rate minus basic rate) on the
top-sliced gain.

Also, if you are a basic rate taxpayer, you add the top-sliced gain on
top of your income. If this pushes you into higher rate territory,
there will be a proportionate tax charge.

You can avoid being taxed by remaining a basic rate taxpayer. If the
bond was written in the UK rather than Offshore, and you are subject to
UK tax, there is little chance of evading an income tax charge if one
is due.

Re. point 2, The bond itself is the wrapper, which houses the
underlying investments. Just like an ISA or a pension is effectively a
'wrapper'.


P.S. If you are thinking of investing in a 'Guaranteed' equity bond
that is linked to an index or some other arbitary future event, I would
advise reading the small print very carefully. Especially how much risk
your capital you are risking if the product does not meet its 'target'.
A lot of these products are quite complicated and confusing......
 
J

john boyle

In message said:
The answer is - you MAY you subject to income tax. Investment Bonds are
technically written as Life Insurance policies (the life insurance
element is minimial - usually 101% of the investment value), so CGT
does not apply. However, if you buy a second-hand policy, and are not
the life assured, CGT may come into the equation (but this is kinda
getting off the point)....

Under current rules, you can withdraw 5% of the original investment
each year (or roll this up for future years) and defer any tax until
you encash the bond.

Do a google search for 'investment bond chargeable events' & 'top
slicing' to read up on how the gain and subsequent tax is calculated.
Bascially, work out the gain, take into account any withdrawals +
chargeable events, and divide by the number of years the bond has been
in force. Then add this amount to your income for the tax year in
question.

If you are a basic rate taxpayer, you will probably pay no additional
income tax, because the underlying investments within the bond have
already been taxed. However, if you are a higher rate taxpayer, there
could be an additional 18% charge (higher rate minus basic rate) on the
top-sliced gain.

Also, if you are a basic rate taxpayer, you add the top-sliced gain on
top of your income. If this pushes you into higher rate territory,
there will be a proportionate tax charge.

You can avoid being taxed by remaining a basic rate taxpayer. If the
bond was written in the UK rather than Offshore, and you are subject to
UK tax, there is little chance of evading an income tax charge if one
is due.

Re. point 2, The bond itself is the wrapper, which houses the
underlying investments. Just like an ISA or a pension is effectively a
'wrapper'.


P.S. If you are thinking of investing in a 'Guaranteed' equity bond
that is linked to an index or some other arbitary future event, I would
advise reading the small print very carefully. Especially how much risk
your capital you are risking if the product does not meet its 'target'.
A lot of these products are quite complicated and confusing......

All of the above I agree with but some of these structured products,
despite having the word 'bond' in their title, are actually OEICS and
some are bank accounts. The latter pay 'interest' and are taxable as
income and can cause havoc to those on receipt of age allowance.
 
S

sylvian stone

You may have guessed, but I'm no fan of the majority of these products.

Now that 'With-Profits' has such a bad image, I've noticed that a lot
of these products are sold instead, and people are sold the old line
that 'you can have your cake and eat it'....

Is anybody such an expert that they can predict with any precision
where the FTSE 100 will be at in five years time ?
 
J

john boyle

In message said:
You may have guessed, but I'm no fan of the majority of these products.

Now that 'With-Profits' has such a bad image, I've noticed that a lot
of these products are sold instead, and people are sold the old line
that 'you can have your cake and eat it'....

Is anybody such an expert that they can predict with any precision
where the FTSE 100 will be at in five years time ?
I agree. Many people think that they are spreading their risk evenly
over 100 companies (or whatever the index is), whereas they are exposing
about 40% of their investment to the volatility of only three companies.
Safe? My A****!
 
G

GSV Three Minds in a Can

Bitstring <1126866387.304367.54460@o13g2000cwo.googlegroups.com>, from
the wonderful person sylvian stone said:
Is anybody such an expert that they can predict with any precision
where the FTSE 100 will be at in five years time ?
12,213.574 .. is that enough precision?

Oh wait, did you want =accurate= too? 8>.
 
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S

sentinel

I think many people just look at (or are sold) the headline marketing
rates. a la With Profits headline bonus rates....

A lot of these products seem to be about 90% invested in an MTM, and
the remaining 10% used to play the derivatives markets. Minimal or no
equity content at all. What happens if the traders get their calls
wrong.....

P.S. What assumptions is Mr 3 Minds using to predict the FTSE 100 in
Sep 2010 ?

We'd like to know.......

SC.
 
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