Without experienced planning, tax can erode long-term wealth. Investing with a tax-efficient strategy also helps maximise potential returns and improve cashflow, bringing your financial goals closer.
For higher- or additional-rate taxpayers, tax-efficient investing is crucial. Fail to invest with a well-planned strategy and the difference between pre-tax and post-tax returns can be substantial.
There are several ways to invest tax-efficiently and reduce liabilities.
1. Use the right wrapper
Individual Savings Accounts (ISAs)
Everyone over 18 and resident in the UK is allowed to invest up to £20,000 in a Stocks and Shares ISA (for the tax year 2022/23). It’s also possible to save up to £9,000 (for the tax year 2022/23) for children through a Junior ISA.
Investments in an ISA grow in a tax-efficient way and so do not incur Income Tax or Capital Gains Tax (CGT) when sold.
We encourage every client to make use of the annual ISA allowance. If you already hold investments outside ISAs, deploy the “bed and ISA” strategy. This involves selling assets to realise a capital gain and then immediately buying back the same assets inside an ISA. After which, all future gains on the asset will be free of CGT.
Self-invested personal pension (SIPP)
Compared to other pension arrangements, a SIPP can allow more flexibility and investment options while still enjoying all the tax benefits associated with pension savings.
Tax benefits of pension savings include tax relief on personal contributions up to £40,000 per annum gross, and the ability to carry forward any unused allowance from the past three years.
By way of example, someone earning £120,000 in 2022/23, and who paid £30,000 into their pension in each of the tax years 2019/20, 2020/21, and 2021/22, would typically be able to pay up to £70,000 into their pension this year using carry forward.
This equates to the full £40,000 allowance for 2022/23 plus £10,000 of unused allowance carried forward from each of the past three years.
Offshore bonds
Used to invest money over the medium to long term, offshore bonds are tax-efficient because they don’t usually incur tax on investment growth. Withdrawals can also be made without being subject to Income Tax, up to a defined limit each year.
Trusts
Tax treatment on investments held in trust is different to personal investments. In particular, trusts are a useful way to protect and pass wealth to future generations while retaining control over investment decisions and payments to beneficiaries.
2. Take note of Capital Gains Tax
CGT is charged on profits made when selling, gifting, transferring, or exchanging assets, such as shares, collective investments, personal possessions worth £6,000 or more, and property that isn’t a primary residence.
Higher- and additional-rate taxpayers pay CGT at 20% on gains from investments. For basic-rate taxpayers, this rate may be reduced to 10%.
The CGT exemption allows tax-free gains of up to £12,300 in the 2022/23 tax year. Unlike some allowances, the CGT exemption can’t be carried forward into the next tax year – in other words, use it or lose it.
Strategic use of the tax-free exemption each year could reduce the risk of incurring a significant CGT liability in the future.
There are numerous ways to reduce CGT and retain more wealth. Managing CGT effectively can be highly complex and there’s a risk of paying it unnecessarily.
We can help you understand all options available to protect your portfolio from CGT, but here are two ways to help reduce your tax liability.
Make use of losses
It’s possible to minimise CGT liability by using losses to reduce the gain subject to tax. Unlike the CGT exemption, which is immovable, unused losses from previous years can be brought forward, as long as they are reported to HMRC within four years from the end of the tax year in which the asset was disposed of.
Transfer assets to your spouse or civil partner
Transfers between spouses and civil partners are exempt from CGT. To be eligible, transfers must be a genuine gift. Used effectively, transfers can double the CGT exemption for married couples and civil partners to £24,600.
3. Consider venture capital schemes
Venture capital schemes provide funding for relatively young companies in the early stages of the business cycle. For experienced investors, comfortable taking more risk with their capital, these schemes can provide attractive tax breaks.
The UK government has established three schemes, all offering tax advantages.
Enterprise Investment Scheme (EIS)
Designed to encourage investment in early-stage companies not listed on a stock exchange, the EIS Â offers tax benefits such as:
- Income Tax relief of 30%
- No CGT on gains realised on the disposal of EIS investments, provided the investments are held for three years
- CGT deferrals if proceeds are invested in qualifying EIS investments
- Inheritance Tax (IHT) relief for investments held for two years.
Venture Capital Trusts (VCTs)
Unlike the schemes above, VCTs are investment companies listed on the London Stock Exchange and invest in smaller companies that meet certain criteria. Tax breaks include Income Tax relief of 30%, tax-free dividends, and an exemption from Capital Gains Tax on the shares, should they rise in value.
While offering generous tax advantages, these schemes are intended for investors comfortable with taking more risk with capital.
Talk to experts who care
We take tax seriously and work in conjunction with financial planners to provide solutions that protect and grow your wealth.
As legislation is subject to change, a tax strategy that saves money now may not work in the future. We keep a close eye on the ever-changing tax laws and will adjust your strategy accordingly when the goalposts are moved.
If you have any questions about the tax efficiency of your investment portfolio or want to find out more about how we can look after and grow your wealth, please don’t hesitate to get in touch. Email us at enquiries@bowmorefp.com or call01275 462469.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future
Bowmore Financial Planning Ltd is not regulated to provide tax advice. A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
Bowmore Financial Planning Ltd is authorised and regulated by the FCA.
