How to optimise tax-efficiency by rewrapping client wealth

Our new ongoing tax comparison tool helps you identify clients who may save tax from looking at the different tax-efficient investments available. The tool lets you quickly review each client's GIA holdings and see whether they could lower their income or capital gains tax bill in an onshore bond. As you’re aware, tax is one consideration within your client’s wider circumstances and can therefore act as a catalyst for those conversations. Additional consideration is needed if larger withdrawals are being taken from the investment on a regular basis.

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One of the key benefits of a bond is that it is considered a ‘non-income producing asset’. Income and gains are assessed on the UK insurer rather than the bond holder. There is only a tax event for your client when there is a chargeable event and potentially an income tax liability, for example when a policy is surrendered, withdrawals above the 5% withdrawal allowance or the last life assured dies.

Onshore bonds are subject to a charge for the UK corporation tax on interest and capitals gains the insurer has paid. To reflect this, the bond holder is given a 20% income tax credit on any chargeable event gain – reducing the personal income tax due on encashment.

With a GIA, where income is generated every year, any amounts in excess of personal tax allowances will create an income tax liability. In addition, a CGT disposal occurs every time you sell some or all of the investment – such as withdrawals, fund switches, and rebalances. With the reduction in annual CGT and dividend allowance thresholds, this means more people will be paying tax on these types of investment for the first time.

For those clients paying tax above 20% on investment income or gains, a bond might help to improve the net returns you achieve for them.

We've created this comprehensive guide to help you understand the benefits of using onshore bonds effectively in your planning.

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Please visit the trust planning section of our website for further help and support in recommending trusts. Material available on this site will help you understand how trusts work, the range of trusts available, and how to create a trust with Quilter.

Quilter’s most popular trust is the Lifestyle Trust. This flexible solution enables clients to gift money into trust with the option of taking capital payments in the future. Clients can either take or defer the payments when the time comes. This flexibility helps to reassure clients who may be worried about making irrevocable decisions about their own future financial needs.

For more information on the Lifestyle Trust please visit our Lifestyle Trust section.

Gifts out of normal expenditure is a useful exemption which can avoid having to wait for seven years for a gift to fall outside your client’s estate for IHT purposes.

3 conditions must be met for gifts to qualify:

1. It forms part of the individuals (settlor's) normal expenditure
2. It was made out of their income
3. It doesn't cause a reduction in their standard of living

If all these conditions are met, then there is no limit on the amount which can be gifted and immediately exempt from IHT.

HMRC will usually consider a payment (in this case, a gift) to be regular or habitual if it has been made across three or four years, with the intention of continuing to make further, similar payments. However, even if the individual should die after only one such gift, it's possible to establish that it meets this requirement, if it can be shown that it was your client's intention to make the gift regularly on a habitual basis. Documentary evidence of intention is therefore important.

Each case will have its own unique set of circumstances. What advisers need to weigh up is whether other tax-wrappers can provide a more effective home for the capital, and whether other strategic measures, such as rebalancing pension wealth between spouses, funding pensions for children/grandchildren, or trust planning can help.

For an example of how the PCLS can be used effectively to help rebalance pension wealth between spouses please see our Tom case study.

As announced at the Autumn Budget, the decision to include pension wealth within IHT from 6 April 2027 has been made. However, the detail on how they intend to implement this remains outstanding.