Achieving Tax Efficiency for UK Basic-Rate Taxpayers' Portfolios

B

The most tax-efficient solution for a UK resident basic-rate taxpayer who requires an income would be to hold fixed-interest funds within a stocks and shares ISA. Therefore, the correct answer is option B.

Explanation:

A basic-rate taxpayer is someone who earns between £12,571 to £50,270 (tax year 2021/22) and pays income tax at a rate of 20%. For such taxpayers, it is important to consider tax-efficient investment options when constructing a portfolio that provides income.

Option A suggests investing only in offshore products, which may not necessarily be tax-efficient for a UK resident taxpayer. While offshore products may offer some tax benefits, they can be complicated, costly, and subject to different regulations in different countries. In addition, offshore products may not provide the same level of protection as UK-regulated products.

Option C suggests purchasing National Savings & Investments (NS&I) Fixed-Interest Savings Certificates. While these products are tax-free, they may not offer the best returns. Moreover, the maximum investment limit is £10,000 per person, which may not be sufficient for some investors.

Option D suggests holding high-yielding equities within a stocks and shares ISA. While equities may provide higher yields, they also carry higher risk. In addition, high-yielding equities may not necessarily be tax-efficient, as dividends are subject to taxation.

Therefore, the most tax-efficient solution would be to hold fixed-interest funds within a stocks and shares ISA. This is because:

1. Fixed-interest funds, such as bond funds, provide a stable income stream and are generally less volatile than equities.
2. Stocks and shares ISA provides tax-efficient growth and income. The income and capital gains generated within the ISA are tax-free, and investors do not need to report them on their tax returns.
3. Basic-rate taxpayers can earn up to £1,000 in interest income tax-free outside of an ISA. However, any interest income over this threshold is subject to income tax. Holding fixed-interest funds within a stocks and shares ISA can help avoid income tax on interest income.

In conclusion, option B, holding fixed-interest funds within a stocks and shares ISA, would be the most tax-efficient solution for a UK resident basic-rate taxpayer who requires an income.