A private OEIC (Open Ended Investment Company) could be the solution if you have maxed out the allowances available for tax wrappers such as pensions and ISAs.
It is an alternative tax efficient way of investing large sums of wealth for you and your family.
What is a private OEIC?
Pensions and ISAs are usually always the first tax wrappers you should be using for your investments as they benefit from very favourable tax treatment.
For example, income and capital gains are completely tax free inside both wrappers.
However, the downside to these wrappers are that the annual allowances and lifetime allowance specifically for pensions are fairly low.
In the past, holding investment assets inside a Trust was a fairly popular option for those that had reached their limits for ISAs and pensions. It gave you control over the assets but at the same time reducing your personal taxes.
Nowadays Trusts are subject to more and more taxes including an entry charge and ongoing periodic charges depending on the type of Trust in use.
If you are looking to invest in the region of £5 million+ then a private OEIC could be a good option.
A private OEIC is similar to any other publicly available OEIC you might invest in.
There are around 4,000 funds available to investors in the UK which allow you to invest in portfolios of pretty much any globally listed company as well as bonds and commercial property.
Most UK investors will invest in OEICs rather than directly into shares and will hold them in their pensions and ISAs.
The key difference with a private OEIC is that YOU create the fund and you decide where your money is invested. The purpose of the private OEIC is that it is for you only and you retain control over your family’s wealth.
Technically, due to the type of structure, a private OEIC must still be publicly available, so anyone could invest in it, however you are able to set high levels of minimum investment and charges that would deter others in reality.
You could decide to allow other members of your family as shareholders in the private OEIC which again could be very tax efficient.
The benefits of a private OEIC
When creating your private OEIC you decide who you would like your investment manager to be and where you would like to invest.
You then own shares in the private OEIC rather than shares directly in the underlying investments.
The major benefit of this approach is that trading between the underlying investments does not incur any Capital Gains Tax (CGT).
If you were to hold shares directly in a large portfolio outside a pension and ISA, then every time you traded there is the potential that you could incur a large CGT bill.
A private OEIC removes this problem.
This is particularly useful if you wish to own a multi-asset portfolio that you re-balance on a regular basis. The trading will be CGT free inside the private OEIC.
The private OEIC is technically liable to Corporation Tax on any income it receives, but in reality, little if any tax is paid by the OEIC if income like dividends, rental income and bond interest is paid out the OEIC holders.
Income paid out by the OEIC and shares of the OEIC sold could potentially be subject to personal taxation depending on your position. But if you don’t need the income or capital then you could choose a growth investment strategy which ensures there are little in the way of dividends paid out and instead the value of the OEIC could grow over time to be left to your family.
Another key benefit of the private OEIC is that all fees in relation to the management of the OEIC can be deducted from the fund’s gross income rather than you having to pay it from your own taxed income.
Costs for running a private OEIC will depend on the level of wealth invested but typically range from 1%-1.5% of the underlying OEIC value per annum.
As well as a private OEIC there are also other options for investing large sums of wealth into a family structure. These can include a private investment company, a family investment partnership or an offshore bond – which can be very tax efficient for those spending large amounts of time outside the UK.
Is it time you structured your family’s wealth in a proper, more organised tax efficient structure?
If you are keen to explore these areas further then please don’t hesitate to contact us. We work with various partners who have years of experience setting up these types of structures and can tailor a solution to your specific needs.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.