- Her income means that she pays higher rate income tax.
- Has a lump sum of £200,000 available.
- Looking for a flexible tax-efficient investment.
- Important she has access to her investment.
CanInvest Select Account
After speaking with her professional adviser Melina decides to invest the £200,000 into the CanInvest Select Account from Canada Life. The Account consists of a series of identical life assurance policies. Melina chooses for it to be set up with 200 individual policies each with a premium of £1,000 and after discussions with her professional adviser selects a range of suitable investments to be held within the Account.
She is able to withdraw a regular amount as and when she chooses. Using the ‘tax-deferred withdrawals’ facility she can take 5% of the total amount she has invested, so £10,000 each year for a period of 20 years, or 4% for 25 years and so on. As long as the total is less than 100% and it’s no more than 5% a year, there is no immediate liability to income tax. If Melina decides to take any withdrawals, the Account allows her to take these payments, monthly, quarterly, half-yearly, yearly or termly.
If she doesn’t need this regular amount, the 5% allowance is carried over each year. So if, for example, she wants to take money out after the tenth year to fund a world cruise and has not taken anything previously, she could take up to £100,000, which is 50% of the amount invested, without any immediate tax liability.
Any potential tax on these withdrawals doesn’t have to be paid until the Account is cashed-in.
However, taking more than this cumulative 5% allowance is known as an ‘excess withdrawal’ and the amount over the 5% allowance may be subject to income tax if at that time Melina is or is close to being a higher rate taxpayer. Therefore, it may be preferable to cash-in individual policies.
A number of years later, Melina decides that she needs the money within the Account. Despite being a higher rate taxpayer when she started the Account and throughout most of her working life, she is now a basic rate taxpayer. On encashment the amount of profit (or gain) is calculated and is divided by the number of years she held the Account, but is based on her tax position in the year of encashment. This spreading of the profit means that the gains she has made keep her as a basic rate taxpayer and as any liability to the basic rate income tax is covered by the tax paid within the Account, Melina has no further income tax liability.
In addition to this level of access, Melina can switch between investments within the Account without any liability to capital gains tax.
- It can be set-up as a series of identical policies of up to 999 with a minimum premium size of £1,000, providing maximum flexibility when you want to take money from the investment.
- You or your adviser can change the underlying investments at any time without charge.
- During the investment term Melina is able to take money out of the policy without incurring any immediate tax liability providing she stays within the cumulative 5% allowance.
- Any income tax liability when cashing-in policies is based on the policyholder’s tax position at that time.
- As a life assurance policy, the individual policies can be gifted to other people without a tax charge.
- For trustees, it can offer an easy method of investing.
On Melina’s death
- The proceeds of the Account would be available as an asset of Melina’s estate and could be passed on to the beneficiaries of her estate.
- The value could be subject to inheritance tax unless the Account was placed under a suitable trust.
- The value of investments can fall as well as rise and you should speak to a professional adviser to ensure that any investment is suitable for you.