While the software reflects the personal taxation that applies to individuals holding different types of investments – in terms of income tax and/or capital gains tax, etc. – we have not previously had any mechanism for reflecting differences within any of these tax-wrappers themselves.
There is an obvious contrast, in this regard, between UK Onshore Investment Bonds, invested in life funds, on the one hand, and Offshore Bonds, invested in a variety of ‘collective investments’, on the other. Within the former, life fund tax is payable on income received/gains made by the underlying investments. Offshore Bonds, by contrast, benefit from ‘gross roll-up’, with the underlying investment gains not being subject to tax, at source, (asides from an element of withholding tax).
It is obvious that the underlying taxation (of UK life funds) represents a ‘drag’ on growth, relative to Offshore Bonds; because it is the gains that are subject to tax, however, it is imperfect to treat the ‘drag’ as a constant, fixed %.
In order to better capture the relative differences between onshore and offshore bonds, we have introduced a setting to specify an Internal Tax Rate to be applied to onshore bonds. The internal tax rate will only be applied to growth on the account – e.g. a 20% rate of tax would reduce an assumed ‘headline’ growth rate of 5%, to 4% - a reduction of 1% (i.e. 20% of the assumed growth). An assumed ‘headline’ rate of 4%, on the other hand, would see a reduction of only 0.8% (to 3.2%), and so on.
The default internal taxation for onshore bonds can be set as a default in Preferences (the cog icon top-left), Plan Preferences (to the right side of the screen), under Taxation.
The setting in Plan Preferences, to the right side of the screen, will apply to the client case that you are presently viewing. This assumption can also be edited on a per scenario basis within the client case.
The setting in System Preferences, to the left side of the screen, is used only as an initial default in newly created client cases.
This default setting can also be changed for individual onshore bonds on the Investments screen.
Expand Advanced Settings and select Growth & Yield. The tax is set as a percentage in the Internal Tax Rate on Gains field.
If you don't see this setting, check investment Type. The investment must be an Onshore Bond for this taxation option to be made visible.
First Published 02 September 2015, Release 4.0.19
Plan Preferences vs. System Preferences
Changes to this setting on the mirror Default Inflation / Growth Rates panel in System Preferences, on the left side of the screen, will be used only going forward, as you create new client cases. System Preferences are used as a template only for new client cases. Changes to System Preferences will not retroactively affect your existing client cases.
If you want to change this preference in any existing client cases, you will need to open and edit them individually, in each case's Plan Preferences.