We have focused a lot in previous blogs about property taxation, largely because we deal with a lot of clients who invest in property and therefore tax advice geared towards them is of interest.
However there is a significant part of our business that deals with high net wealth individuals who either do not wish to invest in property at all or who have a diverse investment portfolio featuring both property and financial services investments, such as listed company shares, unit trusts and OEICs, AIM listed company shares, onshore or offshore bonds to name just a few. This blog looks at which investments are tax efficient and how you can minimize the tax payable on your financial investments.
The following investments are tax free and should be considered as part of a diverse portfolio:
ISAs (individual savings accounts) – you can invest £20,000 annually in ISAs. These can be cash ISAs, stocks and shares ISAs, innovative finance ISAs, lifetime ISAs, junior ISAs.
Premium bonds – prizes are free from tax
There are also tax allowances that should be taken advantage of:
Personal allowance – currently the first £12,570 of income is tax free (although this is not available to those with income over £125,140 and is reduced once your income reaches £100,000).
Savings allowance – currently the first £1,000 of interest is tax free for basic rate taxpayers, this reduces to £500 for higher rate taxpayers and is lost once you start paying additional rate tax.
Starting rate for savings – there is an additional £5,000 allowance to go against interest, but only for those taxpayers whose other income from salary, pension and rental is fairly low. Many of our clients take advantage of this allowance because we structure their company income withdrawals in such a manner that the allowance applies.
Dividend allowance – currently the first £2,000 of dividend income is tax free.
The following investments have tax advantages and should be explored if you are looking to minimize tax on your portfolio:
Pension savings – despite rumours that the tax breaks are to be reduced there is currently still higher rate tax relief available for payments made into a registered pension scheme. That makes pensions a very attractive form of savings, particularly as pension funds are usually outside your estate for inheritance tax purposes and can be passed to your beneficiaries. There may be tax for them to pay, depending on your age when you die. There is an annual allowance of £40,000, being the maximum you can pay into a pension each year. This could be reduced to as little as £4,000 if your income is very high. Any unused annual allowance can be carried forward for up to three years.
EIS/SEIS (enterprise investment scheme/ seed enterprise investment scheme) and VCT (Venture Capital Trust) investments – investing money into very new (SEIS) or fairly new (EIS) companies come with significant risks, but also attractive tax reliefs. If you are prepared to take the risk you will receive 30% (EIS) or 50% (SEIS) income tax relief on your investment. You will also qualify for valuable capital gains tax reliefs and after owned for two years the investments fall outside your estate. VCTs are also high risk investments but come with a 30% income tax relief in most cases, no CGT when the investment is sold and dividends are tax-free.
Bonds – you can invest money in bonds and then withdraw 5% of your capital for 20 years tax free. If you withdraw more than that there may be income tax to pay, although for onshore bonds you receive a notional basic rate tax credit to set against the gain.
Tax planning opportunities
Having investments as part of your wealth portfolio gives some exciting opportunities to arrange your tax affairs in the most efficient manner.
Firstly, you should ensure that wherever possible income producing assets are split in the most tax efficient manner. This could be sharing equally with your partner to make use of allowances and rate bands or splitting the income in unequal shares if one of you is a higher earner than the other.
You should also be aware that everyone is entitled to a personal allowance and a dividend allowance, even children. This gives opportunities for income to be spread around family members and for substantial tax savings to be made in the process. The planning does not work for tax purposes where parents ‘gift’ income to their own minor children, however gifts by grandparents do achieve the tax advantages by ensuring the income from the gifted assets is taxable on the children themselves rather than the parents.
Assets owned by minor children (under 18) must be held in trust. This could be a simple bare trust (such as a bank account held by an adult in favour of a minor) or a discretionary trust, which although more complex does come with tax advantages of its own. For more information you may like to read our recent blog.
If you are considering gifts of assets you will need to consider whether any capital gains tax is payable on the transfer. There will be no CGT due where the gift is of cash, where the transfer is between a married couple or civil partners or where no gain has been made on the asset.
Inheritance tax is a big topic for many of the older generations. By gifting investments early enough, not only will there be income tax savings but inheritance tax liabilities can be significantly reduced or wiped out altogether.
All investments carry some form of risk – some much more than others – so it makes sense to make sure you reduce the tax payable on your investment income wherever legally possible. We would always recommend that you seek advice from an independent financial advisor before making any investment decisions and equally it is prudent to speak to your client relationship manager about the tax implications. If you are interested in any of the investments detailed above and are looking for a independent financial adviser then please call us.
The content in this blog is correct as at 4 July 2022. See terms and conditions.