Tax depends on your personal circumstances and if in doubt you should seek professional advice. We cannot offer advice on tax. The tax summary we provide relates to the position of a UK resident individual taxpayer (not including trustees or personal representatives). Other categories of taxpayer should consider their own circumstances.
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. Additional rate taxpayers are not entitled to the personal savings allowance. This means the first £1,000 (£500 for higher rate taxpayers) of interest income will be free of income tax (but please note the withholding requirement referred to below – see “Is any tax withheld from my Cash Returns?). All investments on Abundance except Variable Return Debentures pay returns that are treated as interest.
What is the Dividend Allowance?
From the 2016/2017 tax year you have a £5,000 tax free dividend allowance and the dividend tax credit system which operated in earlier years ceased to apply. This means the first £5,000 of dividend income is free of dividend tax (the £5,000 figure is expected to reduce to £2,000 in tax year 2018/19 and subsequent years). 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.
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. See below for exceptions to this.
For any investments issued 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 whether to and if so, how best to implement withholding tax on these investments and will update Abundance members if this is the case.
Most people can earn some interest from their savings without paying tax so it may be possible to reclaim tax deducted (depending on personal circumstances). Please see the question on ‘How do I reclaim tax withheld?’ for more information.
- ISA: Investments held in an Abundance Innovative Finance ISA will not have withholding tax deducted as returns within an ISA are tax free.
- Companies: Investments held by company accounts on Abundance (where the company is a UK incorporated and resident company) will not have withholding tax deducted.
- Variable Return Debentures: No tax is deducted for Cash Returns from a Variable Return Debenture as your return is treated as a dividend in this instance, not interest.
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 the amount deducted exceeds your actual tax liability (taking into account allowances available to you). 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 when you are required to complete a return (e.g. because the income is not covered by available allowances or because any tax deducted from interest payments does not discharge your full tax liability). 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 interest from a tax perspective.
|Type of investment||Capital repayment||Investment income|
|Variable Return Debenture||Not taxable||Taxed as dividend|
|All other types of investment on Abundance including Fixed Return Debenture, Inflation-linked Debenture, Income Growth Debenture, Short Term Debenture, Development Debenture, Corporate Bond||Not taxable||Taxed as interest|
Fixed, Inflation-linked, Income Growth, Short Term and Development Debentures and Corporate Bonds
For the majority of the investments on Abundance the investment income is treated as interest from a tax perspective. This is the case for all investment types on Abundance except Variable Return Debentures. 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 the tax owed on dividends has been simplified with the removal of tax credits. Instead 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. Any dividends you received will be treated as part of your taxable income (even to the extent covered by the allowance) when determining the applicable tax band for your taxable income.
|Tax band||Dividend tax rate 2017/18|
The Government has announced that the £5,000 allowance amount will reduce to £2,000 for the tax year 2018/19 and subsequent years.
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 pay corporation tax on their investment income and on capital gains.