Investors could be paying extra tax on corporate bond unit trusts and OEICs this year regardless of any changes that are made to Capital Gains Tax in June’s budget, according to Prudential.
The expectation that CGT will be raised has led to speculation that investors should sell up and reinvest into bonds, either onshore or offshore but Prudential are suggesting that, even before any budget changes, individuals may be better off tax-wise in a bond.
Last year £8billion was invested in bonds through retail sales and corporate bonds were the best-selling IMA sector in 2008 and 2009 and for the first quarter of 2010.
Richard Leeson, Head of Investment Development said: “Last year, corporate bonds saw some capital growth, but this was a one-off. Now, all the returns are likely to come from interest, which is liable for income tax. So the annual CGT allowance and the CGT rate - whatever they may be - do not apply.”
Instead, 20 per cent income tax is deducted in the fund each year and higher/additional rate taxpayers are liable for the extra through their annual tax returns.
Bonds, on the other hand, benefit from tax deferral. This means cash-in values will be higher (given the same growth rate and charges), especially if the investor's tax rate drops before cash-in.
Where the investor is taking regular withdrawals, the differences are even more marked. He added: "Because offshore bonds enjoy gross roll-up, they can sustain regular withdrawals far better than collectives, where the capital will be eroded more quickly.”
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