New government legislation means the 2023/24 tax year has seen significant changes to the investment landscape. Many allowances, for instance, have been reduced – potentially affecting the tax efficiency of clients’ investments. Most are “use it or lose it” allowances and therefore, depending on individual client circumstances, it’s important to make sure they are used in order to minimise taxation.  

What have been the main changes introduced this tax year? 

• The main rate of corporation tax has risen to 25%  
• The additional rate tax threshold has been reduced to £125,140 – it’s expected that the number of individuals who will pay tax at 45% will increase by 55% this tax year 
• The annual exempt amount for capital gains tax has been reduced from £12,300 to £6,000 (reducing to £3,000 in 2024/25) 
• The dividend allowance has been reduced from £2,000 to £1,000 (reducing to £500 in 2024/25) 
• Income and inheritance tax thresholds have been frozen until 2028 – the government estimates an additional 1.1 million individuals will be paying higher rate tax by 2028 while 300,000 more will be paying the additional rate 
• Pension Annual allowance increased to £60,000. 

Taxation within collective investments 

In order to minimise tax for clients, it’s very important to understand taxation within a collective investment. Collectives differ from investment bonds (offshore and onshore) in a number of ways.  

Bonds tend to be used to provide income and/or growth and are held for the medium to long term. The 5% tax deferred income is achieved by encashing units. Collectives can generate a natural income from their underlying investments, removing the need to encash units to provide income.

While holders of both investment bonds and collectives can utilise the starting rate for savings and the savings allowance, let’s consider when these will actually be used. Generally, for investment bonds, it’s when a chargeable event occurs (such as when the bond is encashed). With collectives, there is the ability to use these and the other allowances on an annual basis in order to offset the income and gains generated. So, while the savings allowance and starting rate for savers allow up to £6,000 of income to be received tax free, how often will they be utilised within an investment bond?

With a collective investment, returns come from three sources – gain on the investment, interest generated and dividend income. For each element, there is an allowance that can be offset against the return each and every year.  

The tax clients incur on their collective investments will be dependent on a number of factors: 

• The assets they hold 
• The return they make 
• The type of return and their tax position in the year that the return is made 
• The allowances available.  

The allowances that can potentially be utilised by someone holding a collective in this tax year are as follows:  

• Personal allowance      £12,570 
• Savings allowance       £1,000 
• Dividend allowance     £1,000 
• Total tax-free income  £14,570 
• CGT allowance           £6,000 
• Total tax-free return    £20,570 

These allowances provide significant annual tax planning opportunities for advisers whereby the overall tax burden on assets held within a collective can be reduced. 

Dealing with taxable gains 

Where a client has taxable gains, there are a number of strategies they can use to reduce tax on their investments: 

1. Encash taxable gain up to the CGT annual exemption 
2. Use “Bed & ISA” to tax efficiently move assets from collective to ISA 
3. Use of interspousal transfers 
4. Where applicable, offset gain against tax-advantaged investments, such as VCTs & EISs 
5. Offset losses against gains, where applicable 
6. Use personal pension contributions, up to the annual allowance, to effectively expand the basic rate band - this can result in capital gains being taxed at 10% rather than 20% and therefore reducing the overall tax burden (similarly, where taxable dividends are received, this could result in them being taxed at a lower rate). 

Don’t forget, Fidelity’s capital gains reporting facility can assist with tax-year specific gains for any given client. 

Generating a tax-efficient income from collectives 

For the current tax year, there is the ability to generate tax-efficient returns of £13,000, by making the most of the annual allowances and investing assets accordingly. This could be achieved as follows: 

• Starter rate for savers - up to £5,000 (income) 
• Personal savings allowance - £1,000 (income) 
• Dividend allowance - £1,000 (income) 
• CGT allowance - £6,000 (gain) 

This is in addition to the personal allowance and any income from ISAs or tax-deferred income from investment bonds. This means significant funds can potentially be invested within collectives before any tax becomes due on the returns. So, while some annual allowances may have changed, the fundamentals of why you invest clients’ money in collectives have not! 

Important information

This article provides information and is only intended to provide an overview of the current law in this area and does not constitute financial advice, tax advice or legal advice, or provide any recommendations. The value of benefits depends on individual circumstances. The minimum age clients can normally access their pension savings is currently 55, and is due to rise to 57 on 6 April 2028, unless they have a lower protected pension age. Different options may have different effects for tax purposes, different implications for pension provision and different impacts on other assets and financial planning.

Issued by Financial Administration Services Limited, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0923/382776/SSO/NA