 |
| As a word couplet with saver sex
appeal, 'Tax Free' is second only to 'Halle Berry'. But it often
presages titillation, not satisfaction |
Here are six tax traps:
1) It's the whole tax take
that counts
The tax position of the particular product or wrapper you are buying
is irrelevant on its own. What matters is the total tax paid as
cash flows back from the underlying investment into your hands.
| |
for example..... |
|
| |
Unit trust funds are untaxed. But insurance
funds are taxed on income and capital gains at the basic rate
(22%). So, to level the playing field , income and capital
gains derived from unit trusts are fully taxed in the hands
of a private investor. But he pays only higher rate tax on
distributions from insurance funds.
The general effect is that all income and capital
gains on both these types of fund are fully and equally taxed
at some point on their path into the hands of the private
investor. But your adviser, in his enthusiasm to make a sale,
may sometimes imply that an insurance fund has a tax advantage
("you pay no more tax" or "you only pay higher
rate tax").
In fact, if we want to be picky, insurance funds
are at a tax disadvantage. They pay tax immediately (as opposed
to unit trusts where the tax is deferred until the investor
takes a distribution). And they do not use the private investor's
Capital Gains Tax allowance.
|
|
| |
|
|
2) Mixing apples and oranges
If you buy a washing machine you pay VAT. If you buy a dog you don't.
The fund industry would say something like this: "Dogs are
warmer and more affectionate than washing machines, and they hurt
less when you walk into them. They don't wash very well, but they
have the advantage of being exempt from VAT. This gives them an
advantage over washing machines, which bear tax at 17.5%."
It's rubbish isn't? But you will see stuff like this
over and over again in promotional literature. It's exploiting the
sex appeal of 'Tax Free'. Sex sells.
3) Absense of tax is not automatically
clever
When your
car travels its first 1,000 miles without breaking down you may
feel some slight relief, but it's no more than you expect. So why
should the absense of tax on fundamentally non-taxable transactions
be a selling point?
| |
for example..... |
|
| |
Some insurance bonds allow you to withdraw 5%
of your money each year for 20 years 'tax free'. You might
question why getting your own money back untaxed is so special.
And of course it is not. Capital is never taxed (except
on death). You get the same effect by putting your money under
the mattress and taking out 5% each year.
Students of hyperbole may admire the following
from an IFA's magazine (referring to your choice not to withdraw
your annual 5%); "If you defer taking your income, your
unused tax-free allowances from earlier years can be carried
forward for up to 20 years".
|
|
| |
|
|
4) Sometimes
advisers just get it wrong
Tax is complicated.
| |
for example..... |
|
| |
From April 2004, a fund comprising more than
60% bonds and held within an ISA is treated as a bond fund.
It receives a 20% tax credit on the whole amount of the income.
Since the 40% equity portion, if held alone,
would not qualify for this credit this seemed to be a tax
advantage, and the commentators said so (see sidebar). There
was a big marketing push on these funds - given the catchy
name of 'distribution funds'.
An investment bank, among others, did the sums
properly and showed that the tax credit was only a refund
of extra tax withheld by the fund on its distributions.
|
|
| |
|
|
5) Regulations are not forever
The Chancellor proved this in 1997 when he annexed 20% of the value
of all equity income in pension funds (and PEPs and ISAs) by removing
the refund of dividend tax credits.
So any tax plan requiring a continuing status quo
requires, at the least, a certain scepticism.
6) Sometimes promotions just
get it wrong
The FSA, and indeed the public, will tend to skate over the tax
statements. So more inaccurate stuff gets through, particularly
when it's camouflaged with hyperbole.
| |
for example..... |
|
| |
Here's something a long time ago (2003) from
a popular fund group we won't name. We are sure it's all different
now:
"With a fixed interest element which must never
fall below 60%, under current regulations, the Inland Revenue
treats the income paid by the Fund as interest rather than
dividend income. As a result the Fund does not attract advanced
corporation tax (ACT)."
There are two comments on this:
- So what? There are lots of other taxes
it does not 'attract' either
- ACT ended in April 1999
|
|
| |
|
|
|
