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Put shares in investment bond?

Investment | Investment Trusts Helpful? 7

Asked by Amateur, submitted 10 September 2012.

Open Quote I am very new to investments though I have been given company stocks every year and they have all appreciated in the US while I am based here in Germany. My financial advisor suggested that I "wrap" the stocks that I have already paid taxes on when they vested into the Skandia Bond to avoid paying further tax when those vested stocks appreciate further. I have no experience and have had 2 poor experiences with financial advisors who bailed out without informing me and not looking after my portfoliio resulting in my making losses. This time round, I am really apprehensive and would appreciate your kind advice.

End Quote

Answered by Justin on 11 September 2012

Hard to give a complete answer without knowing your tax situation and future plans. I'm assuming you're tax resident in Germany with the intention of returning to the UK at some point?

It sounds as though you've already paid tax somewhere on the shares when they vested from your employer's scheme and now you own the shares directly you're keen to reduce any further future tax liabilities.

If the shares pay little/no dividend income then the key is avoiding tax on future gains. Gains are only taxable when you sell the shares and your liability at that time will depend on the country where you're tax resident. If the UK, you can offset gains against your annual capital gains tax allowance (£10,600 for 2012/13 tax year). In an ideal world you'd strip out gains to maximise use of your allowance each year to reduce the likelihood of a large taxable gain building up over time. I'm afraid I don't know about the tax treatment of gains in Germany.

Your adviser is likely recommending an offshore investment bond. This means there is no tax on gains and income within the bond. However, it's not tax-free. When you eventually sell the bond any overall profit will be taxable. In the UK, this is calculated via a process called 'top-slicing' (see our life investments page for more details), but in simple terms if you're a higher rate taxpayer when you sell the bond you'll pay higher rate tax on all profits made (i.e. gains and income).

If you don't plan on returning to the UK then the tax treatment of the bond will depend on the country where you're tax resident at the time of selling (the tax authorities there may or may not take an interest in the bond - and let's be honest, I suspect some people just don't bother to declare it if outside the UK, although they could be in trouble if found out).

I'm in two minds about your adviser's motivations.

On the one hand, if you're not likely to return to the UK then an offshore bond might provide a convenient tax vehicle for your shares, albeit profits could eventually be taxable (you'll know it's offshore if the company concerned is 'Royal' Skandia).

On the other, investment bonds do tend to pay high sales commissions (which can cause mis-selling) and probably won't be as tax efficient as regular use of your capital gains tax allowance if you plan to return to the UK sooner than later.

If the adviser is recommending an onshore bond I would be very concerned, as both gains and income will be taxed at basic rate within the bond and this would be especially disadvantageous if you're non UK tax resident.

Hope my answer gives you some pointers, feel free to post further information below and I'll try to follow up with more guidance.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (2) - To post a comment please register or login .

Comment by Amateur at 12:21am on 12 Sep 2012:

Hi Justin,
Firstly, thank you so much for taking time to provide such a detailed response. I really appreciate it. God bless you for that. :)

I am actually a Singapore citizen with residency in Germany. You were right that it was the Royal Skandia bond that my advisor recommended, so it is an off shore bond. I have long term plans to stay in Germany and indeed I want to minimize any taxes on gains.

I am now torn between putting those stocks in the bond or just selling them off and put the money back in Singapore as they have all definitely appreciated by 3dollars per share.

The 2 horrible financial advisors I had before this was all tied to my Generali policy I had with them where they did not explained that it was tied to (denominated in) a certain currency which in this case was JPY when I was working in Japan and that I could not switch it to be denominated in the Euro currency. The funds that the policy had invested in basically made a loss following the 2008 crisis and with the exchange rates it compounded. My current advisor had recently asked that I increase the monthly payments to 540euros, the magical number to reduce the marginal costs to me apparently as I was told. and they have rebalanced the portfolio so I am giving it another 3 months to see if it works, otherwise I am thinking of surrendering the policy and cutting my losses.

Afterwhich I really do not know what I can invest in.

Comment by justin at 10:18am on 18 Sep 2012:

You're welcome and thank you for the further info. If you want to retain the shares longer term then I'd investigate capital gains tax rates and allowances in Germany to see whether there's scope to benefit somehow.

I suspect the adviser is recommending the investment bond on the basis you don't tell tax authorities in future when you sell. There may or may not be tax to pay depending on the country where you're tax resident at the time.

Perhaps start by establishing exactly how the adviser is paid (I'm guessing sales commissions) and the amount they'll receive. It's not uncommon for investment bonds to pay 6%+ initial sales commission, which might explain the adviser's eagerness to sell the policy (although as pointed out in my original answer it might be suitable advice). If you do decide to go ahead then negotiate down the commission he/she takes substantially or, even better, offer to pay a fixed fee you're comfortable with.

The current adviser may be asking you to increase the Generali premium in order to get more sales commission, so I'd be sceptical of their motives. Ask whether they'll receive any further commission if you increase your contribution. I think 3 months is too short a period to judge an investment strategy. If you're sceptical about the investment then seriously consider cutting your losses otherwise I'd give it at least a year, perhaps more.

Good luck!