However, if we consider the overall tax rates for each, we can see the impact of recent changes to tax on capital gains, dividends, savings, and property below:

* 30 October 2024 - Capital Gains Tax (CGT) basic rate increased from 10% to 18% and higher/additional/trustee rate increased from 20% to 24%.

6 April 2026 – Dividend tax Ordinary (basic) rate increased from 8.75% to 10.75% and upper (higher) rate increased from 33.75% to 35.75%.

6 April 2027 – Savings and property income tax increases by 2% (from 20% to 22% for basic rate, 40% to 42% for higher rate & 45% to 47% for additional rate).

Tax rates do not account for any availability of the ‘starting rate for savings’, ‘personal savings allowance’ or Capital Gains Tax (CGT) ‘annual exempt amount’.

A clouded picture

In practice, comparing the tax position becomes more unclear. An investor may not fall within the same tax bracket throughout the lifetime of their investment. It is also unlikely that returns will consist of an equal mix of capital gains, dividends, and other income, with an investment manager often considering tax implications when choosing the underlying investments.

A collective or onshore bond may benefit from paying lower tax before rates increase, whereas an offshore bond benefits from gross roll-up, meaning that minimal tax is paid whilst invested.

Furthermore, an investor in a collective might use their £3,000 ‘annual exempt amount’ to realise gains free of CGT each year, whilst bond investors benefit from top-slicing, tax-deferred withdrawals and assignments as ways to reduce their tax burden when realising gains.

To fully consider which will be the most tax-efficient wrapper, investors will need to consider several other factors, such as:

• How long they expect to hold the investment.
• How their tax status may change over time and the rates of tax they are likely to incur whilst invested.
• The rates of tax likely to be incurred at encashment.
• The investment mix and how returns are likely to be generated.
• The tax position if investments are switched, gifted or the investor dies.

Technical commentary

Tax rates have largely increased for both bonds and collectives in recent years. However, tax shouldn’t be the sole factor when deciding upon the appropriate wrapper. Charges, administrative work/simplicity, and the most appropriate investment for the intended strategy will also need to be considered. 

When deciding the appropriate wrapper, the eventual tax liability will often depend on several unknowns. The financial maxim ‘don't let the tax tail wag the investment dog’ should be remembered here, with the investor’s objectives and what they see as important key to the final decision.

Important information

Please note this is for general information only and is based on LV's understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.