As we approach the final quarter of this tax year, I await the normal flurry of advertising campaigns encouraging investing for tax efficiency: “Use your ISA allowance”, “Maximise pension contributions” and, for those more risk tolerant investors “Use Enterprise Investment Schemes and Venture Capital Trusts to relieve tax.”  Those advisors who are providing holistic advice and levying charges for ongoing advice might also be advising bed and breakfasting or bed and spousing for Capital Gains Tax efficiency.  Does that cover everything?  I suspect not. Let’s explore further in this article ‘Is There Too Much Focus On The Capital Gains Tax Exemption?’.

Overlooked Opportunities

I’ve always been amazed by the number of non or basic rate tax payers who haven’t received any advice about managing the growing gains within their existing life assurance bonds.  It’s an odd thing!  If an investor with a share portfolio or unwrapped collective holds the investment until the day they die, Capital Gains Tax uplift will apply, effectively resulting in tax free gains.  The same can’t be said of a life assurance bond where the death of the final life assured will cause a chargeable event (if the investment hasn’t been surrendered beforehand.)  Of course, this won’t create a definite income tax liability.   There’s the complexities of the life assured and the owner potentially being different parties and the gain not necessarily being taxed on the owner.  If the gain is relatively modest and the party on whom the tax is actually assessed doesn’t have high levels of income, perhaps there won’t be any tax due.  However, that is leaving matters to chance. 

The Complexity of Managing Gains

If gains can be realised annually throughout the life of the investment, it may be possible to avoid a tax liability either through use of the investor’s personal allowance or basic rate band (in the case of gains from top sliced UK-based life assurance bonds).  That would help to reduce the potential of a larger, less manageable gain triggered by the death of the final life assured or in the hands of a beneficiary after the death of the bond owner.

The Underutilised Strategy

In my experience, far greater focus is given to utilising the annual Capital Gains Tax exemption than managing gains within life assurance bonds.  Perhaps because bond gains require a more complex series of calculations.  Perhaps because the basic rate threshold isn’t an exemption as such but more so something that can be combined with UK-based life assurance bonds to achieve tax efficiencies.  Whatever the reason, under requirements for higher and clearer standards of consumer protection introduced by Consumer Duty, it will be difficult to justify why advice in the area of gain management hasn’t been provided – it certainly seems foreseeable.

The Changing Landscape of Tax Exemptions

It’s also worth remembering that, unlike the 2022/23 tax year where the Capital Gains Tax exemption was only £270 less than the personal allowance for income tax purposes, the difference is now more marked.. The Capital Gains Tax exemption now equates to less than half of the personal allowance.  In the next tax year, focusing on the use of a £3,000 Capital Gains Tax exemption, equivalent to less than 25% of the personal allowance, at the expense of managing gains within life assurance bonds, may be misjudged. 

The Importance of Timely Advice 

There’s a Consumer Duty requirement to review the continued appropriateness of advice but, even where the investment wrapper is deemed to remain appropriate, it may still be necessary to consider withdrawing funds for tax efficient reinvestment. Afterall, there’s value that can be proven in the advice being delivered.

The Challenge of Processing Withdrawals

Why am I highlighting this now?  In previous years, life assurance providers have been particularly slow at processing bond withdrawals, especially around tax year end.  It remains to be seen whether turnaround times will improve, given that such delays will cause foreseeable harm in some cases – another area covered by Consumer Duty.  However, if you’ve been diligent enough to complete the calculations to recommend a tax efficient withdrawal or encashment for your client, failure for it to be processed within the appropriate policy, or tax year would be a disaster all round.

Next Up: Understanding the Value of Advice