Tax depends on your specific situation and if in doubt you should seek professional advice. We cannot offer advice on tax.
What is the Personal Savings Allowance?
From the 2016/2017 tax year you have a £1,000 (or £500 for higher rate taxpayers) tax free interest allowance. This means the first £1,000 (£500 for higher rate taxpayers) of interest income will be free of income tax. Fixed, Inflation-linked, Income Growth and Short Term Debentures pay returns that are treated as interest. See below for the tax rate on interest income earned above your tax free allowance.
What is the Dividend Allowance?
From the 2016/2017 tax year you have a £5,000 tax free dividend allowance and tax credits have also been stopped to simplify the taxation of dividend income. This means the first £5,000 of dividend income will be free of dividend tax. Variable Return Debentures pay returns that are treated as dividend. See below for the tax rate on dividend income earned above your tax free allowance.
Where can I find out how much I have earned in a tax year?
There is a Tax section in your Portfolio that sets out exactly what you have earned in each tax year. You can view tax statements and also see a list of any tax credits you have for each tax year.
Is any tax withheld from my Cash Returns?
Current rules from HMRC require that all companies issuing debentures or bonds must withhold a proportion of interest payments equivalent to the basic rate of income tax (currently 20%) and pay this to HMRC directly. Previously Abundance Investment had operated under an exemption, as the majority of our customers are small investors.
Therefore, for any investment you make after 6 April 2017, 20% of your interest payments on Abundance will be deducted and paid to HMRC directly.
Any investment issued before 6 April 2017 currently pays Cash Returns gross with no tax withheld and will continue to do so until further notice. We are currently in discussions with HMRC on how best to implement withholding tax on these investments and will update Abundance members if this is the case.
No tax is deducted for Cash Returns from a Variable Return Debenture as your return is treated as a dividend, not interest.
Most people can earn some interest from their savings without paying tax so it is possible to reclaim tax deducted. Please see the question on ‘How do I reclaim tax withheld?’ for more information.
How do I reclaim tax withheld?
Most people can earn some interest from their savings without paying tax. Your allowance for earning interest tax-free is made up of your Personal Allowance, your starting rate for savings (depends on your other income) and Personal Savings Allowance (depends on your Income Tax band). You can find out more here.
You can reclaim tax deducted from your interest on Abundance if it was below your allowance for the tax year. You must reclaim your tax within 4 years of the end of the relevant tax year. You can reclaim tax either through your Self Assessment tax return or by completing form R40 and sending it to HMRC (this can be by paper or online). It normally takes 6 weeks to get the tax back.
How are my Cash Returns taxed?
Your Cash Return is comprised of three parts:
- Capital Repayment goes towards repaying your original investment, the amount you have lent. Repayments of the amount lent are not subject to income tax.
- Investment Income is treated as income from a tax perspective and will be taxed according to your income tax band. It should therefore be declared on your tax return. Depending on the type of investment, your investment income is treated as interest or as a dividend which are taxed differently — see below.
- Bonus should be treated as income from a tax perspective.
|Type of investment||Capital repayment||Investment income||Bonus|
|Variable Return Debenture||Not taxable||Taxed as dividend income||Taxed as income|
|Fixed Return Debenture||Not taxable||Taxed as interest income||Taxed as income|
|Inflation-linked Debenture||Not taxable||Taxed as interest income||Taxed as income|
|Income Growth Debenture||Not taxable||Taxed as interest income||Taxed as income|
|Short Term Debenture||Not taxable||Taxed as interest income||Not applicable|
Fixed, Inflation-linked, Income Growth and Short Term Debentures
With a Fixed Return, Inflation-linked or Income Growth Debenture the investment income is treated as interest from a tax perspective. Your Cash Return will therefore be taxed according to your income tax band and should be declared on your tax return.
Companies paying interest are required to withhold a proportion of interest payments equivalent to the basic rate of income tax (currently 20%) and pay this to HMRC directly. Please see the question on ‘Is any tax withheld from my Cash Returns’ for more information.
You can learn more about the tax you pay on interest here.
Variable Return Debentures
With a Variable Return Debenture your investment income will be taxed in the same way as a dividend on a share. This is because the size of your investment income is linked to how the underlying project performs. The amount of dividend tax you pay depends on whether you are a non-taxpayer, basic rate, higher rate or additional rate taxpayer — see below.
From 6 April 2016
From 6 April 2016 the tax owed on dividends has been simplified with the removal of tax credits. You now have a dividend tax free allowance of £5,000 and then any dividend returns over that amount are taxed according to your income tax band as below.
|Tax band||Dividend tax rate 2017/18|
Tax year 2015/16
In the tax year 2015/2016 you received a tax credit on dividend returns. Since the Issuer had already paid corporation tax on your Cash Return, you were entitled to a notional tax credit equivalent to one-ninth of the dividend income. This tax credit is used to offset against any tax you have to pay on your investment income. Abundance will issue you a tax voucher which provides details of the total amount of your investment income and the tax credit. In calculating the amount of tax you owe, you should multiply the dividend income amount by the effective dividend tax rate according to your income tax band — this already takes into account the tax credit.
|Tax band||Effective dividend tax rate|
|Basic rate (and non-taxpayers)||0%|
If you do not earn enough to pay income tax (i.e. your taxable income is less than the personal allowance), you cannot reclaim the tax credit.
If you normally complete a tax return, you should show the investment income and the tax credit on it. If you do not normally complete a tax return, but you have a higher rate or additional rate tax to pay on the investment income, you should contact H.M. Revenue and Customs.
What about Initial Interest?
Some projects have an Initial Interest Period during which interest is paid from the date you invest to the date the first Cash Return Period starts as long as the Debenture reaches its Minimum Threshold Amount. Any interest earned during this period will be treated as interest from a tax perspective and it will therefore be taxed according to your income tax band.
What about Inheritance Tax (IHT)?
Debentures may be subject to IHT if they are the subject of a gift or if they form part of the estate of an individual on death. Any Debenture holder who has any doubts as to his or her IHT position should consult a professional adviser.
Capital Gains Tax
If you sell your Debentures at a gain (i.e. you sell them for more than they cost you to buy) you may need to consider the impact of CGT. This applies if all the gains (not just Debenture sales) you have realised in a relevant tax year are more than the annual exemption for that year — for 2017/18 that figure is £11,300. If your gains for a relevant year are more than this, you pay:
- 20% of the gain if you are a Higher Rate Taxpayer
- 10% of the gain if you are a Basic Rate Taxpayer
You should also consider the impact of CGT if your Debentures are the subject of a gift or you transfer them to a bare trust. Any Debenture holder who has any doubts as to his or her CGT position should consult a professional adviser.
What about non-UK residents?
Please see the section for non-UK residents here.
What about stamp duty?
The issue of a Debenture will not give rise to a charge to stamp duty or stamp duty reserve tax (SDRT).
The Debentures are expected to be exempt from any liability to stamp duty and SDRT on the occasion of any sale of a Debenture. If, unexpectedly, any such liability were to arise, the rate of stamp duty or SDRT potentially payable by the buyer on the purchase price for the Debenture would be 0.5% — if we become aware of any such liability we will tell you about this and the arrangements for payment of it.
What about taxpayers who are not individuals?
The position of companies, partnerships, trusts or unincorporated associations is complex and investors in these categories should get appropriate tax advice on their position. As a general rule, UK companies will not pay corporation tax on their investment income but will be subject to corporation tax on capital gains.
What are the tax implications of Bare Trust Accounts for children?
This depends on the source of the money to buy the investment. If either or both of the child’s parents are the source of the money, any earnings on Debentures count as income of the child up to £100 per year. If income is more than £100 per year, all income is treated as income of the parent for tax purposes and so will be taxed at the tax rate which the parent pays. This applies until the child is 18, or earlier if the child marries, enters into a civil partnership or the parent dies. Capital gains of a bare trust are, however, treated as those of the child.
If the source of the money is someone else (for example, grandparents or aunts and uncles), any income is treated as income of the child. It will therefore be subject to the child’s tax allowances — for 2012/13 the child’s income tax personal allowance limit is £9,440.
When the child is 18, he or she will be taxed on all income or capital gains on any Debentures.
Capital gains realised by the trustees of a bare trust are usually treated as realised by the beneficiary of the trust (e.g. the child). Please see the section on CGT.
Setting up a bare trust may be subject to Inheritance Tax (IHT) and Capital Gains Tax (CGT). Please see the sections on IHT and CGT.