Investment Trusts and Shares

Tax Treatment

Unit Trust Performance

Unit Trusts & Income Tax

Open ended investment companies were introduced into the UK in 1997, from Europe.

Open-ended means shares in the fund will be created as investors invest and cancelled as they cash in. Closed-ended funds like investment trusts have a fixed number of shares to be bought and sold.

OEICs have a structure somewhere between an investment trust and a unit trust.

A single price is quoted for OEIC shares, and a levy shows the cost of buying and selling the shares. This is shown on investment documentation along with the:

      gross amount invested; 

      initial charge;

      net amount used to buy shares.

OEICs are intended as a medium to long term investment. Because this investment may go down in value as well as up, you may not get back the amount invested.

Please contact us for more information on Open Ended Investment Companies.

An endowment policy is a savings and life assurance policy for an agreed period, the minimum term being 10 years. A tax free benefit is normally paid out at maturity or on earlier death.

The policyholder may sell the policy in the traded endowment market, as an alternative to surrender before the end of the term, although this must be carefully considered as financial penalties will often apply.

There are charges on all endowment policies and the Key Features document from endowment providers will explain these.

Early surrender will usually incur further charges from the provider.

Endowment policy types

Types of endowment policies include With profits, low cost, unit linked, low start, flexi endowment, and friendly society plans. 

If you withdraw from this type of investment in the early years you may not get back the amount invested.

With profits endowment policy

With profits endowment policies are normally enhanced with regular bonus payments. Bonuses are added to the sum assured and once added can be withdrawn at certain times. Please follow links below for more information.

Bonuses may be added annually (known as the reversionary bonus) and at the end of the term (a terminal bonus) depending on investment performance.

Low cost endowment

Low cost endowment policies were invented by insurance companies to reduce the cost of the with profits policy, and provide a means of paying back an 'interest only mortgage.'

It is a combination of a with profits endowment policy and decreasing term assurance (to ensure the capital sum borrowed is repaid in the event of death).

Bonuses are added to the endowment sum assured with the intention that there should be sufficient cover to repay ,say, a mortgage at the end of the period. Low cost endowment policies are not guaranteed and maturity levels depend on investment performance.

Low start endowment

Low start endowment policies were Introduced to help young 'first time house buyers'. Low start endowments are another type of with profits policy where bonuses are added to the endowment sum assured. The level of cover is the same as the low cost endowment, but premiums start at a lower level and then increase at a set percentage for five years. The eventual premium is higher than the level premium under a low cost endowment policy.

Unit linked endowment policies

Premiums buy units in a fund of the investor's choice. Units will be cancelled each month to buy life cover. There is investment flexibility as funds can be switched.

Units will be purchased at the offer price and sold at the bid price (usually lower) incurring a bid offer spread charge of around 5%. Set up costs will be taken off the fund value.

Flexi endowment

A policy is written say for a total term, say to the age of 65, with options to encash after 10 years without penalty. The policies are usually written in segments to allow some to be encashed and some to be continued. This may be suitable for school fees planning.

Friendly society plans

Friendly society funds enjoy favourable tax treatment and are tax -free to the investor.

Level and bases of, and reliefs from taxation are subject to change.

The tax treatment is dependent on individual circumstances and may be subject to change in future.

An investment bond is in fact a whole of life policy usually paid for with a lump sum or single premium.

Proceeds can be taxable if the investor is a higher rate taxpayer and may also be taxable for lower rate taxpayers.

The money invested is used to buy units in a selected fund. Most insurance companies offer a wide range of funds from low to high risk.

Investment Bond Special features

5% of the original investment can be withdrawn each year for 20 years (until entire capital is returned), deferring taxation until final encashment. The main Advantages of an investment bond are given below.

• a packaged investment for growth;
• can take income by cashing in units;
• simple to operate;
• wide range of geographical funds available.

Types of investment bond include With profits, distribution, guaranteed growth and unit linked.

These are intended as a medium to long term investment. If you withdraw from this investment in the early years you may not get back the amount invested.

With profits bonds

With profits bonds tend to be very popular with the more conservative investors as returns are smoothed. The underlying investment funds usually consist of a balanced portfolio of UK investments, overseas equities, fixed interest stock, cash deposits and sometimes property.

Annual bonuses are usually added to the policy, but there is no guarantee of the bonus rate from year to year. This depends on the performance of the underlying investments within the bond and the level of smoothing adopted by the life company.

Part of the with profits fund growth is held on reserve - the balance is declared as a bonus. Using reserves allows a 'smoothing out' of performance.

The with profit bonus rate may not look very competitive in years of good stock market returns, however the reverse is generally true when stock market returns are poorer. There is also a bonus payable on maturity known as the terminal bonus although this is not guaranteed.

Distribution bonds

These provide income and the underlying investment fund tends to be invested in income producing assets. This type of fund is useful for the investor taking withdrawals from a bond, as interest or dividend is taken rather than original capital.

Guaranteed income and growth bonds - Income bonds offer a regular, annual or monthly payment at a guaranteed rate for a fixed term. At the end of the term the original investment is returned.

The guaranteed growth bond, as its name implies, offers guaranteed growth on capital at the end of a fixed term say five years. These types of bonds should not be used if you are at all likely to cash in early.

Surrender values are often not available and if they are given they will result in a lower yield than the guaranteed rate. Some guaranteed growth and income bonds are written as single premium endowment policies.

Stock market bonds

These products allow exposure to the stockmarket, and generally offer the greater of the return of the capital invested or the performance in the FT-SE or other stockmarket index over a given time period.

This is intended as medium to long term investment. If you withdraw from this investment in the early years you may not get back the amount invested.