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Tax efficient investments

4 July 2022
Jan Friend
Reducing Tax

Are you interested in finding out more about tax-efficient investments?

We have focused a lot in previous blogs about property taxation. This is 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. Some of these either do not wish to invest in property at all. Others want a diverse investment portfolio. Typically that would feature 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.

Tax-free 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.

Tax allowances

There are also tax allowances that you could take advantage of:

Personal allowance

Currently the first £12,570 of income is tax free. This is not available to those with income over £125,140 and only reduces once your income reaches £100,000.

Savings allowance

Currently the first £1,000 of interest is tax free for basic rate taxpayer. 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 with fairly low income from salary, pension and rental. Many of our clients take advantage of this allowance. 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.

Tax-efficient investments

The following investments have tax advantages and you should explore them if you are looking to minimize tax on your portfolio:

Pension savings 

Despite persistent rumours that the government will reduce the tax breaks there is currently still higher rate tax relief available for contributions into a pension scheme. That makes pensions a very attractive form of savings. Additionally 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, which is the maximum you can pay into a pension each year. This could reduce to as little as £4,000 if your income is very high. You can carry forward any unused annual allowance 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 comes 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. After owned for two years the investments fall outside your estate. VCTs are also high risk investments. However they 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. However 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.

Split your income

Firstly, you should ensure that wherever possible you split income producing assets in the most tax efficient manner. This could be sharing equally with your partner to make use of allowances and rate bands. Alternatively you could split the income in unequal shares if one of you is a higher earner than the other.

Use your allowances

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 as the income from the gifted assets is taxable on the children 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. Although more complex a discretionary trust does come with tax advantages of its own. For more information you may like to read our recent blog.

If you plan to gifts 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 cash, where the transfer is between a married couple or civil partners or where you make no gain on the asset.

Inheritance tax is a big topic for many of the older generations. By gifting investments early enough, there will be income tax savings and inheritance tax liabilities can be significantly reduced or wiped out altogether.

Consider tax friendly products

All investments carry some form of risk – some much more than others. So it makes sense to ensure 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. 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.

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