Question
I am very new to investments though I have been given company stocks every year and they have all appreciated in the US while I am based here in Germany. My financial advisor suggested that I "wrap" the stocks that I have already paid taxes on when they vested into the Skandia Bond to avoid paying further tax when those vested stocks appreciate further. I have no experience and have had 2 poor experiences with financial advisors who bailed out without informing me and not looking after my portfoliio resulting in my making losses. This time round, I am really apprehensive and would appreciate your kind advice.
Answer
Hard to give a complete answer without knowing your tax situation and future plans. I'm assuming you're tax resident in Germany with the intention of returning to the UK at some point?
It sounds as though you've already paid tax somewhere on the shares when they vested from your employer's scheme and now you own the shares directly you're keen to reduce any further future tax liabilities.
If the shares pay little/no dividend income then the key is avoiding tax on future gains. Gains are only taxable when you sell the shares and your liability at that time will depend on the country where you're tax resident. If the UK, you can offset gains against your annual capital gains tax allowance (£10,600 for 2012/13 tax year). In an ideal world you'd strip out gains to maximise use of your allowance each year to reduce the likelihood of a large taxable gain building up over time. I'm afraid I don't know about the tax treatment of gains in Germany.
Your adviser is likely recommending an offshore investment bond. This means there is no tax on gains and income within the bond. However, it's not tax-free. When you eventually sell the bond any overall profit will be taxable. In the UK, this is calculated via a process called 'top-slicing' (see our life investments page for more details), but in simple terms if you're a higher rate taxpayer when you sell the bond you'll pay higher rate tax on all profits made (i.e. gains and income).
If you don't plan on returning to the UK then the tax treatment of the bond will depend on the country where you're tax resident at the time of selling (the tax authorities there may or may not take an interest in the bond - and let's be honest, I suspect some people just don't bother to declare it if outside the UK, although they could be in trouble if found out).
I'm in two minds about your adviser's motivations.
On the one hand, if you're not likely to return to the UK then an offshore bond might provide a convenient tax vehicle for your shares, albeit profits could eventually be taxable (you'll know it's offshore if the company concerned is 'Royal' Skandia).
On the other, investment bonds do tend to pay high sales commissions (which can cause mis-selling) and probably won't be as tax efficient as regular use of your capital gains tax allowance if you plan to return to the UK sooner than later.
If the adviser is recommending an onshore bond I would be very concerned, as both gains and income will be taxed at basic rate within the bond and this would be especially disadvantageous if you're non UK tax resident.
Hope my answer gives you some pointers, feel free to post further information below and I'll try to follow up with more guidance.
I am very new to investments though I have been given company stocks every year and they have all appreciated in the US while I am based here in Germany. My financial advisor suggested that I "wrap" the stocks that I have already paid taxes on when they vested into the Skandia Bond to avoid paying further tax when those vested stocks appreciate further. I have no experience and have had 2 poor experiences with financial advisors who bailed out without informing me and not looking after my portfoliio resulting in my making losses. This time round, I am really apprehensive and would appreciate your kind advice.
Answer
Hard to give a complete answer without knowing your tax situation and future plans. I'm assuming you're tax resident in Germany with the intention of returning to the UK at some point?
It sounds as though you've already paid tax somewhere on the shares when they vested from your employer's scheme and now you own the shares directly you're keen to reduce any further future tax liabilities.
If the shares pay little/no dividend income then the key is avoiding tax on future gains. Gains are only taxable when you sell the shares and your liability at that time will depend on the country where you're tax resident. If the UK, you can offset gains against your annual capital gains tax allowance (£10,600 for 2012/13 tax year). In an ideal world you'd strip out gains to maximise use of your allowance each year to reduce the likelihood of a large taxable gain building up over time. I'm afraid I don't know about the tax treatment of gains in Germany.
Your adviser is likely recommending an offshore investment bond. This means there is no tax on gains and income within the bond. However, it's not tax-free. When you eventually sell the bond any overall profit will be taxable. In the UK, this is calculated via a process called 'top-slicing' (see our life investments page for more details), but in simple terms if you're a higher rate taxpayer when you sell the bond you'll pay higher rate tax on all profits made (i.e. gains and income).
If you don't plan on returning to the UK then the tax treatment of the bond will depend on the country where you're tax resident at the time of selling (the tax authorities there may or may not take an interest in the bond - and let's be honest, I suspect some people just don't bother to declare it if outside the UK, although they could be in trouble if found out).
I'm in two minds about your adviser's motivations.
On the one hand, if you're not likely to return to the UK then an offshore bond might provide a convenient tax vehicle for your shares, albeit profits could eventually be taxable (you'll know it's offshore if the company concerned is 'Royal' Skandia).
On the other, investment bonds do tend to pay high sales commissions (which can cause mis-selling) and probably won't be as tax efficient as regular use of your capital gains tax allowance if you plan to return to the UK sooner than later.
If the adviser is recommending an onshore bond I would be very concerned, as both gains and income will be taxed at basic rate within the bond and this would be especially disadvantageous if you're non UK tax resident.
Hope my answer gives you some pointers, feel free to post further information below and I'll try to follow up with more guidance.
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