The effect of the initial change was far-reaching, with advisers seen to move dramatically away from insurance bonds in favour of OEICs and other products taxed to CGT.
While this move was driven by comparisons of CGT versus income tax, it has almost become accepted wisdom that an insurance bond should only be looked at for a client after they have used their annual CGT exemption of £10,600 (2011/12). It has caused some advisers to overlook the nature of the underlying portfolio to ascertain the source of the investment return.
Where the investment return is generated by income (for example from corporate bond investments) then clearly the annual CGT exemption is of no value and the returns will be taxed year by year at income tax rates. That is, unless the client is using an insurance bond; and deferring income tax – ideally until they retire and can make withdrawals or encashments at lower levels of income tax. Of course, if the investment returns are from capital gains rather than income then products taxed under the CGT regime will be preferred in most cases.
Most people have a mix of assets in their portfolio and will hold both equities and fixed interest investments. For these clients it is necessary to either separate their assets in to the respective products or conduct a “portfolio x-ray”.
This involves looking at the mix of assets, any possible changes to that asset mix in the future and then determining which product type will offer superior post-tax returns. There are many calculators and spread sheets available from both investment companies and insurance companies to assist the adviser.
