Different investments have different tax treatment

Individual Savings Accounts (ISAs)
You pay no personal income tax or capital gains tax on any growth in an ISA, or when you take your money out. If you invest in a stocks and shares ISA, any dividends you receive are paid net, with a 10 per cent tax credit. There is no further tax liability.


Please be aware that the impact of taxation (and any tax reliefs) depends on individual circumstances. Current tax rules and rates are valid until 5 April 2010 and may change in the future.

Unit Trusts and Open Ended Investment Companies (OEICs)
With a unit trust or OEIC your money is pooled with other investors’ money and can be invested in a range of sectors and assets such as stocks and shares, bonds or property.

Dividend income from OEICS and unit trusts invested in shares

If your fund is invested in shares then any dividend income that is paid to you (or accumulated within the fund if it is reinvested) carries a 10 per cent tax credit. If you are a basic rate or non taxpayer, there is no further income tax liability. However, higher rate taxpayers currently have a total liability (2009/10) of 32.5 per cent on dividend income; the tax credit reduces this to 22.5 per cent.

Any interest paid out from fixed interest funds (these are funds that invest for example in corporate bonds and gilts, or cash) is treated differently to income from funds invested in shares. Income is paid net of 20 per cent tax.

Capital gains tax
No capital gains tax is paid on the growth in your money from the investments held within the fund, but when you sell, you may have to pay capital gains tax. Bear in mind that you have a personal capital gains tax allowance that can help you limit any potential tax liability. Any gains over this allowance is currently taxed at 18 per cent (2009/10), regardless of whether you are a higher or basic rate taxpayer.

Accumulated income
Accumulated income is interest or dividend payments which are not taken but instead reinvested into your fund. Even though they are reinvested they still count as income and are subject to the same tax rules as for dividend income and interest.

Investment bonds (insurance / life assurance bonds)

Onshore investment bonds
Investment bonds have a different tax treatment from other investments. This can lead to some valuable tax planning opportunities for individuals.

There is no personal liability to capital gains tax or basic rate income tax on proceeds from your bonds. This is because the fund itself is subject to tax, equivalent to basic rate tax.

You can withdraw up to 5 per cent each year of the amount you have paid into your bond without paying any immediate tax on it. This allowance is cumulative so any unused part of this 5 per cent limit can be carried forward to future years (although the total cannot be greater than 100 per cent of the amount paid in).

If you are a higher rate taxpayer now but know that you will become a basic rate taxpayer later (perhaps when you retire for example) then you might consider deferring any withdrawal from the bond (in excess of the accumulated 5 per cent allowances) until that time. If you do this, you will not need to pay tax on any gains from your bond.

Onshore investment bond considerations:

Certain events during the lifetime of your bond may trigger a potential income tax liability:


Some transfers of legal ownership of part or all of the bond.

On the maturity of the bond (except whole of life policies).

On full or final cashing in of your bond.

If you withdraw more than the cumulative 5 per cent annual allowance. Tax liability is calculated on the amount withdrawn above the 5 per cent.

If you are a higher rate taxpayer or the profit (gain) from your bond takes you into a higher rate tax position as a result of any of the above events then you may have an income tax liability. As you are presumed to have paid basic rate tax, the amount you would liable for is the difference between the basic rate and higher rate tax.

The events may also affect your eligibility for certain tax credits.

The taxation of life assurance investment bonds held by UK corporate investors changed from 1 April 2008. The bonds fall under different legislation and corporate investors are no longer able to withdraw 5 per cent of their investment each year and defer the tax on this until the bond ends.

Offshore investment bonds
Offshore investment bonds are similar to UK investment bonds above but there is one main difference.

With an onshore bond tax is payable on gains made by the underlying investment, whereas with an offshore bond no income or capital gains tax is payable on the underlying investment. However, there may be an element of withholding tax that cannot be recovered.

The lack of tax on the underlying investment means that potentially it can grow faster than one that is taxed. Note that tax may be payable on a chargeable event at a basic or higher rate tax as appropriate.

Remember that the value of your fund can fluctuate and you may not get back your original investment.

UK shares and taxation
If you own shares directly in a company you may be liable to tax.

Any income (dividends) you receive from your shares carries a 10 per cent tax credit. However, higher rate taxpayers have a total liability of 32.5 per cent (2009/10) on dividend income; the tax credit reduces this to 22.5 per cent.

When you sell shares you may be liable to capital gains tax on any gains you may make. You have a yearly allowance, above which any gains are liable to 18 per cent tax. Special rules apply to working out your gains or losses.