Asset-backed Investments

Different types of asset-backed investments include:

• Shares
• Unit Trusts
• Individual Savings Accounts (ISAs)
• Investment Bonds

Rates and allowances refer to 2023/24 tax year.

Shares

Shares are issued by companies who wish to raise money.

The best known shares are bought and sold daily on international Stock Markets. There are several different types of share but the most common are simply called ‘ordinary shares’.

A shareholder will normally receive a dividend twice a year which is related to the profitability of the company. The board of directors decide how much the dividend will be in any given year. Dividends can be raised, lowered or stopped altogether, but past experience has shown that over the medium to long-term they tend to rise, thereby giving investors some protection against inflation, however this is not guaranteed.

In the short-term, share prices may fluctuate in response to changes in opinion about the company itself or the general outlook for business and the economy as a whole. However, in the medium to long-term, past experience has shown the tendency for share values to rise (ie. capital growth). This helps protect the real value of the investor’s capital against inflation.

Please note past performance is not a guide to future performance.

Selling shares may produce a capital gain for investors (ie. the value realised at the sale may be greater than the value at the time of purchase). A capital gain realised on the sale of shares is potentially liable to Capital Gains Tax.

Capital losses may be set against gains for tax purposes. Investing in individual shares can be risky and picking the wrong company could mean losing some or all of the original investment.

Investors may pay personal tax on income or gains unless the shares are held within an ISA or income is covered by allowances such as the dividend allowance or personal savings allowance.

* See below for tax treatment of dividends on shares.

Unit trusts

Unit Trusts are pooled investment vehicles. This means relatively small sums from clients are pooled to form a large fund, which is able to invest in a broad spread of stocks and shares and other assets.

Investors’ interests are protected by the terms of a trust deed which must be approved by the Financial Conduct Authority before a unit trust is authorised to accept clients’ money.

Because they invest in stocks and shares, unit trusts must be viewed as medium to long-term investments. This means that they should be held for at least five years, preferably longer, in order that the investor can potentially benefit from capital growth and a rising income.

Unit trusts offer investors significant advantages. The fund can invest in a broad spread of stocks and shares which brings greater security than investments into an individual company’s shares.

Each fund will benefit from the expertise of a professional fund manager who takes on the responsibility of the day to day investment decisions. Unit trusts offer a simple way of benefiting from an investment in the stock market. They avoid the complications and many of the risks associated with a person buying and selling individual stocks and shares.

Units can be easily bought and sold and the prices are published in the press. The price at which units can be purchased by individuals is called the offer price which is higher than the selling or bid price. The difference between the two is known as the bid-offer spread.

The prices of units are determined by the value of the assets in the fund. As the asset value rises or falls so do the offer and bid prices of units.

Income from assets owned by a unit trust is accumulated and regularly distributed to unit holders (normally twice a year) either as dividends or interest depending on the assets of the fund. Alternatively income may be re-invested by purchasing more units. Income, whether distributed or re-invested, is liable to income tax.

If, when units are sold, their value is greater than when they were purchased the investor will have made a capital gain. This is potentially liable to Capital Gains Tax if it exceeds the investor’s exemptions and reliefs.

* See below for tax treatment of dividends and interest on Unit Trusts.

Individual Savings Accounts (ISAs)

Available since April 1999, ISAs offer an attractive tax-efficient shelter to anyone aged 18 or over (16 or over for cash ISAs).

In 2023/24 individuals are able to invest up to £20,000 in total into ISAs. The investment could, if required, be shared between a cash ISA and a Stocks and Shares ISA (or other type of ISA) with transfers being allowed between the two.

Investors do not pay any personal tax on income or gains.

Investment bonds

Investment bonds are single premium life assurance policies. There is a high allocation to investment and relatively low life cover. They are pooled investments whereby relatively small amounts of individual investor’s money will be invested to create large pooled funds, maintained by a life assurance company.

Investments can be spread across a broad range of assets including property, shares, Government stocks and companies’ loan stocks, thereby reducing the risk for investors. It is, however, very important to realise that investment bonds are medium to long-term investments. As such they should not be considered for periods of less than five years.

There are two basic types of contract for investment bonds.

For the first of these (with-profits), the sum assured will be increased by bonuses related to the company’s profits.

For the second type of contract (unit-linked) the life assurance company maintains a number of underlying funds which are divided into units, the value of which is determined by the value of the assets in the fund.

The value of an investor’s investment will, therefore, be determined by the value of the units in the underlying fund and the amount of units that they hold. The funds may specialise in particular areas for example, property, shares, government securities, or they may cover some or all of these in a managed or mixed fund. Income and capital growth is accumulated within the funds.

With a UK investment bond (not an offshore bond) the tax on income and capital gains is ‘deemed’ to have already been paid within the product at basic rate by Her Majesty’s Revenue and Customs. As long as their capital remains invested within an investment bond, investors will have no personal liability for either income tax or capital gains tax.

When money is withdrawn from a UK bond (for example, to provide income) or the bond is totally surrendered there will still be no liability for either basic rate income tax or capital gains tax (the fund has already paid these). Higher rate tax payers may have to pay extra tax.

However, the rules governing bond taxation are such that higher rate tax may be reduced or even avoided altogether with careful planning.

It is normally possible for investors to withdraw money from an investment bond, either on a regular or irregular basis, without bringing the bond to an end. This is important where income is a priority.

Up to 5% pa of the original investment can be withdrawn as a partial withdrawal (until such time as all of the original investment has been withdrawn in this way) without triggering an immediate tax charge (the tax assessment is deferred until the bond or segment is fully encashed).

Withdrawals can be made by surrendering part of a bond, but there can be adverse tax consequences for large withdrawals, and you should seek advice before making a partial surrender. However, some bonds divide the original investment into a number of small policies. In this case withdrawals can be made by totally surrendering some of these small policies. This may have certain tax advantages for the investor.