There's a limit to the amount of tax free investment that can be made into Individual Savings Accounts. It is therefore important to consider other forms of investments, especially if you wish to invest capital exceeding the annual ISA restrictions. It is wise to place money into more than one type of investment.
Here is a description of some popular choices…
Although not tax free Unit Trusts, Open Ended Investments Companies and Investment Trusts provide planning opportunities, which could help make use of annual Capital Gains Tax and Income Tax exemptions.
Unit Trusts
A Unit Trust allows an investor to pool their funds with others, enabling investment into a wider, more diversified range of assets. A Fund Manager, who takes decisions in line with the stated aims of the fund, normally looks after funds. Funds are used to buy shares and securities and are held within an open ended fund. Investors are referred to as Unit holders and the number of Units they hold and the price of each unit determine the investment value. Returns are attracted in the form of both income and capital growth.
Open Ended Investment Company
An OEIC is a unitised investment fund, where investors own shares in a company and have a right to dividends either as income or as accumulated growth. Investments within an OEIC must be spread over a good range of assets in line with the objectives of the fund. OEICS operate on a single price basis, with the value reflected in the market value of the investments held within the fund.
Investment Trusts
Investment trusts are similar to both Unit Trusts and OEICS but constituted as a Close-ended company. The investor places money in the company and the company invests into a wide spread of shares in other companies. The aim is to achieve growth and income. Investors pool their money, so the managers can invest into underlying assets. The price of each individual trust moves in line with supply and demand and prices are quoted on the Stock Exchange for each fund.
Tax
All of these investments can be subject to a level of both income and capital gains tax. However, with careful planning and use of exemptions and allowances some, or maybe all, can be avoided. An individual has an annual allowance for Capital Gains and also a tapering relief is applied if an investment is held for significant lengths of time. Specific advice should be sought before using any of these instruments. This will insure the correct selection and suitability.
Investment Bonds
Investment Bonds are issued by insurance companies and are, despite their "marketing name", single premium whole of life assurance policies. Whilst the life cover will normally be small, by being categorised as life assurance, policy investment bonds will give certain tax advantages. Funds are normally invested into Unit Linked funds containing UK Equities, International Equities, Property or Mixed and Managed Funds. The value of the investment is then determined by the unit price of the funds selected. It is normally possible to switch between investment funds with little charge. With profits Funds are sometimes also available.
Income is taxed at basic rate within the fund and therefore further tax is only normally chargeable on gains to higher rate taxpayers. Withdrawals are permitted from the fund by all investors, who can withdraw up to 5% of the amount originally invested each year, for 20 years. This is free of tax and this limit can be carried forward to future years if not used.
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