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Specialist View

Specialist View: February

Welcome to this month’s Specialist View where we take a look at the impact of the changes in dividend taxation, how this could affect your clients and how Sanlam can help.

With changes to dividend taxation taking effect from April 2016, we look into the effects of this and provide solutions for your clients.

So what are the changes?

From April 2016, the 10% notional dividend tax credit will be abolished and replaced with a new system of taxation.
For individuals, (including property held in a bare trust) the first £5,000 of dividend income will be taxed at 0%, giving everyone a new ‘dividend allowance’. For income from dividends above £5,000, it will be taxed as follows:

  • Basic rate taxpayers - 7.5%,
  • Higher rate taxpayers - 32.5%
  • Additional rate taxpayers - 38.1% 

Trustees of Discretionary trusts, however, will not qualify for the new dividend allowance and will be taxed as follows:

  • First £1,000 (the standard rate band)* will be taxed at 7.5%
  • Over £1,000 income, will be taxed at 38.1% 

*It should be remembered, that the standard rate band for trustees is split by the number of trusts the settlor has settled up to a maximum of five, meaning that at a minimum, each trust will have a standard rate band of £200.
Personal representatives, executors and trustees of interest in possession (IIP) trusts will pay tax at the basic rate of 7.5% on dividend income, i.e. they do not receive the £5,000 dividend allowance. 

How will this affect clients?

The main aim of this legislative change was to target tax avoidance by business owners who paid themselves a salary up to the personal allowance and then paid themselves in dividends from their company up to the higher tax threshold.
While it has achieved its main aim, it has also had unintended consequences on others in society. For example, a basic rate taxpayer with income from dividends in excess of £5,000 will now have to complete a tax return and declare all dividend income accumulated or distributed, possibly for the first time. This could incur extra expense in the form of accountant fees or indeed penalties if the client fails to declare or gets it wrong.
Another consequence relates to executors, personal representatives and trustees of IIP trusts. As we have already stated, they will not receive the £5,000 dividend allowance and will pay tax as above. What this means in practice is, they would have to pay the estate beneficiary or life tenant the net dividend after the tax has been paid even though the recipient may be a non-tax payer.
The IIP trustees receive £5,000 of dividend income post 6 April 2016. They would pay the net dividend of £4,625 to the life tenant with a credit of £375 tax paid. The beneficiary would then have to reclaim the tax paid from HMRC subject to the individual having some of all of their dividend allowance intact.
Higher rate taxpayers and additional rate taxpayers may also have to pay increased tax on their dividend income compared to tax year 2015/16.

Investment Bonds vs. Direct Investments

HMRC have confirmed that the changes to the dividend taxation legislation will not affect UK life companies and how investments owned by them are taxed, i.e. at life company tax rates (currently a maximum of 20%) and not at the dividend tax rates that will be introduced from 6 April 2016.
With this now confirmed, it would be prudent to look at the tax position of the client when recommending direct investments or investments bonds and what could be the most suitable option for them.
The table below shows what the net tax position would be for clients within the different tax brackets and could help you in making your recommendations. It is important to note however that all of the personal and financial details for each individual client need to be considered before making the recommendation.

* Further tax payable on chargeable event gain

The table[1] above shows the following:

  • Basic rate taxpayers – tax position would be the same if within the dividend allowance but more favourably taxed within the bond where the income received is above the dividend allowance and the client remains a basic rate taxpayer after any chargeable event.
  • Higher rate taxpayer – tax position more favourable for direct investment if the income is within the dividend allowance but more favourable in the bond if above the allowance.
  • Additional rate taxpayer - tax position more favourable for direct investment if the income is within the dividend allowance but more favourable in the bond if above the allowance. 

When looking at this table however you should remember that:

  • If the clients are higher or additional rate taxpayers or trustees of relevant property trusts, then the ability to assign bond segments or the whole bond to a basic rate paying spouse/ beneficiary would be an advantage.
  • The inter-spousal transfer of directly invested assets would mean there would be no Capital Gains Tax (CGT) to pay when moving between spouses and potentially up to £22,200 of CGT allowance could be used to offset against any gains.

How can Sanlam help?

The Versatile Investment Portfolio (VIP) is a single premium unit-linked onshore investment bond which enables policyholders to effectively link the performance of their policy to specific securities and authorised collective investment schemes without that policy falling within the definition of a Personal Portfolio Bond for tax purposes. All investments are subject to the permitted links rules.

Features include:

  • The unique open architecture means clients are not restricted to investing in collective investments only.
  • Existing share and unit trust/OEIC portfolios can effectively be self-invested within the wrapper.
  • Existing trusts as well as a range of Sanlam specimen trusts can be used for effective Inheritance Tax planning.
  • Clients can nominate their own Discretionary Investment Manager (DIM) or they can manage the fund themselves.

Clients who may be suitable for the VIP are Individuals or Trustees who:


  • Must be prepared to invest £100,000 or more for the medium to long term (at least five years).
  • May require regular tax efficient income.
  • Wish to have control over the investments
  • Are active investors and wish to avoid triggering a personal tax charge during the investment term.
  • Wish to benefit from simple tax administration on an ongoing basis.
  • Wish to mitigate the effects of inheritance tax by taking advantage of a trust arrangement.
  • Are higher or additional rate taxpayers: 
    • ​With an income-producing portfolio, as less tax is paid on income during the term of the investment than if the assets are held directly.
    • Who expect to become basic rate taxpayers when the life insurance bond is surrendered.
    • Are able to assign the whole and or segments of the bond to a basic rate tax payer prior to surrender.

Clients who are unlikely to be suitable for the VIP are Trustees or individuals who:

  • Want a low risk investment.
  • Have less than £100,000 to invest.
  • Are looking for a short-term investment.
  • Are likely to be higher or additional rate tax payers at the time of surrender and have limited ability to assign the bond to a lower rate tax payer. 

For further information on the Versatile Investment portfolio, please speak to our client service team on 01179752355 or email them on ClientServices@sanlam.co.uk.

[1] Source for information on the table from Techlink article posted 7 January 2016 

Date Issued: February 2016

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at February 2016 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

Past performance is no guarantee to future performance. The value of investments can fall as well as rise so investors could get back less than they invest.

Sanlam & Sanlam Investments and Pensions are trading names of Sanlam Life & Pensions UK Limited (SLP (Reg.in England 980142)) and Sanlam Financial Services UK Limited (SFS (Reg. in England 2354894)). SLP is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. SFS is authorised and regulated by the Financial Conduct Authority. Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol BS1 2NH. 

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.