Three ways to skin the income rabbit and produce higher net returns

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William Forsyth By William Forsyth, Investment Manager at ‘Charlotte Square’, Investment Managers

20 December 2016

As the low interest environment continues to affect investors, Investment Manager William Forsyth offers some alternatives for those looking to secure a higher rate of return on their investments.

In a low interest environment, higher nominal returns over cash deposit rates are always welcome. There are a number of asset classes offering returns around 5% with a reasonable level of capital security, however, it would seem logical to look to find a route to improve net returns on funds that can often be heavily diminished by high marginal tax rates.

1. Zero preference shares

While much reduced in number this category of preference capital ranks ahead of the ordinary shares in an investment trust. The shares are issued at a discount to maturity value a number of years in the future. By using an annual CGT exemption of £11,100 a redemption yield of 3.3% can produce an equivalent income yield of 5.5%.

The Capital Gains Tax exemption is not just useful for converting quasi bond returns to income, it is a very useful shelter for capital gains of any qualifying kind in its own right.

2. Bespoke portfolio(s) to use personal allowance

Recent changes to taxation suggest more attention should be paid as to which spouse holds the funds, and in which asset classes the funds should be invested.

If someone’s earned income is below the personal allowance they can receive up to £6,000 interest, free of tax. This suggests a healthy allocation to fixed interest investments such as corporate bonds will be effective in investment portfolios.

A tax-free Dividend Allowance of £5,000 a year is now available to everyone, regardless of their tax rate, which suggests an equity based portfolio would also be efficient in terms of personal tax. 

3. Using legitimate tax shelters

Most financial advisers recommend an Individual Savings Account (ISA) when guiding a client to build a pot of funds. An ISA has a great advantage over other saving options, and grows free of Income and Capital Gains tax, and any income taken is tax free. Subscription is presently limited to £15,240 per adult, per annum, so a married couple can save £30,480 per annum.

The value of built up ISAs can now be transferred to a surviving spouse tax-free, on death, and ensures that tax efficiency is retained.

The Government is all too aware of the taxation benefits conferred by self-invested pension schemes (SIPPs) and has been gradually reducing their scope but contributions are still highly tax efficient. For partially “tax sheltered” income, once in retirement a SIPP can produce an element of “tax free income” allowing up to 25% of the fund as a tax-free sum while withdrawals of up to the personal allowance (£11,000) can be taken without giving rise to an income tax charge, assuming no other income is received.

This official bearing down on personal pension planning has persuaded a growing number of investors to look again at Offshore Bonds. These have the advantage that gains are assessed against the more generous tax-free savings allowances of up to £6,000 per annum which is in addition to the tax-free £11,000 personal allowance. These illustrations can be used to deploy surprisingly large amounts of capital.


About the author

William Forsyth is an Investment Manager at ‘Charlotte Square’ an investment management boutique situated in the heart of Scotland’s financial centre and offering a highly personalised discretionary investment management service for a range of private clients, trusts, pension schemes, corporate funds and charities. He is a Chartered Fellow of the Chartered Institute for Securities and Investments (CISI) and is a founder of the business.

To find out more please contact WForsyth@charlotte.eu.com

About the company

Charlotte Square is a trade name of Raymond James Investment Services Ltd (Raymond James) utilised under exclusive licence. Raymond James is authorised and regulated by the Financial Conduct Authority. With investment, your capital is at risk. The price of investments and the income from them can go down as well as up and neither is guaranteed. Nothing contained in this article constitutes investment, legal, tax, regulatory or other advice, nor should be relied upon in making an investment or other decision.


This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.

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