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How you can help to simplify your clients' ongoing tax and reporting obligations

When building a financial plan for your clients, any ongoing tax and reporting obligations are an important consideration. For your clients holding collective investments outside of a tax-efficient wrapper, these considerations may now be front of mind as many may need to declare and pay tax on their dividend distributions for the first time.

Knowing when the tax and reporting burden kicks in will help you ensure your client is aware of their ongoing responsibility, and will also help you make informed decisions about whether other options, such as offshore bonds, could offer your clients a simpler solution.

Ongoing tax and reporting requirements:

Any interest or dividend distributions from collective investments held outside of a tax-efficient wrapper are paid gross (subject to certain withholding taxes). This places an ongoing reporting burden with the client, including clients who are basic rate taxpayers and those who have distributions accumulated rather than paid to them.

There are some allowances available to clients, which may mean these distributions don’t need reporting as there is no tax to pay. A change to the dividend allowance took place from April 2018, reducing the allowance from £5,000 to just £2,000. This means more of your clients may now need to declare their dividend distributions and pay any tax due to HMRC.

This table summarises the tax and reporting obligations, and which clients may have a tax and reporting obligation:



Available allowances Tax-free dividend allowance of £2,000 p.a. Interest distributions are taxed as savings income. The client may be eligible for:
- The Personal Savings Allowance (£500 for higher rate taxpayers and £1,000 for basic rate taxpayers).
- The 0% starting rate tax band for savings (up to £5,000 depending on earnings. Clients earning over £17,500 are not eligible for this).
Tax and reporting obligations Dividends over the allowance need to be declared to HMRC each year and any tax due must be paid at the following rates:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers
Interest payments over the allowances need to be declared to HMRC each year and any tax due must be paid at the following rates:
- 20% for basic rate taxpayers
- 40% for higher rate taxpayers
- 45% for additional rate taxpayers
Clients that may have a reporting and tax obligation Clients with more than £50,000 in dividend producing collectives, based on a 4% dividend yield, could face a tax and reporting burden.

For example, a higher rate taxpayer holding £125,000 at 4% yield p.a.:
- dividend distribution = £5,000
- amount to declare to HMRC = £3,000 (£5,000 - £2,000 dividend allowance)
- amount of tax to pay = £975 (@ 32.5% tax)
Depends on the allowances available to the client.
- Basic rate taxpayers with £6,000 in allowances could face a tax and reporting burden if they hold more than £150,000 in interest producing collectives, based on a 4% yield.
- For higher rate taxpayers, with just £500 in allowances, this reduces to £12,500 in interest producing collectives.

Example, a higher rate taxpayer holding £125,000 at 4% yield p.a.:
- interest distribution = £5,000
- amount to declare to HMRC = £4,500 (£5,000 - £500 Personal Savings Allowance)
- amount of tax to pay = £1,800 (@ 40% tax)


Ensuring your clients are aware of the reduced dividend allowance

Under the previous £5,000 dividend allowance, based on a 4% dividend yield, clients could hold up to £125,000 in dividend distributing funds without any ongoing tax and reporting obligation. The new £2,000 allowance means clients holding just £50,000 could now be impacted.

If you have clients holding between £50,000 and £125,000, they are most at risk from this change as they may not have previously needed to report anything and may not fully understand their new obligation.

Investing for growth

Clients also hold collective investment funds outside a tax-efficient wrapper to achieve capital growth, for example, through equity growth funds. These types of funds will focus on growing the value of the fund rather than on producing a dividend or interest yield, so there may be little or nothing to declare on an ongoing basis.

Whilst there might not be anything to declare on an ongoing basis, left unmanaged, there could be capital gains tax (CGT) implications in the future. A good way to manage this is to use the annual CGT allowance (£12,000 in the 2019/20 tax year) to realise a gain and reduce any future tax liability.

Utilising CGT allowances on a regular basis takes time and often advice is required. If the proceeds of the sale are four times the annual exemption, then it must be disclosed to HMRC (even if the gain itself is within the exemption).

How offshore bonds can help provide simplicity

With an offshore bond, the client could potentially leave their money in the wrapper for years and not worry about any ongoing administration or reporting to HMRC.



Virtually tax-free growth As the bond provider is based in an offshore jurisdiction, income and gains are allowed to build up tax-free in the funds (apart from any withholding tax which may apply on overseas funds). Any growth on the funds is not subject to capital gains tax.
Simpler ongoing reporting and administration Income and dividend distributions do not need to be reported, regardless of the amount. There is no annual CGT allowance to utilise each year, and no CGT on switching, so funds can be actively managed without concern for CGT implication.


Interested to know more?

Offshore bonds brochureThis article just looks at simplifying the reporting and tax obligations of clients. There are of course other factors which you will have to consider when selecting the right solutions for your clients.

We have a new simplified brochure explaining the growing advice opportunities for offshore bonds and how they can work alongside other solutions to help provide better overall control, flexibility and tax efficiency for your clients.

If you would like to know more about offshore bonds, please contact your usual Old Mutual Wealth consultant today, or contact your local offshore specialist.

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