Tax Efficient Investing

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The UK Government has introduced a range of schemes designed to support and encourage tax efficient investing. There are various ways you can reduce or shelter your tax liabilities by investing through one or more of the following tax efficient opportunities including; ISAs, SIPPs, Venture Capital Trusts, BPR Investments, SEIS Investments and EIS Investments. Find out which is the UK’s most tax efficient scheme and how you can achieve up to 64% tax relief.

Investors Guide:
Tax Efficient Investing

Tax efficient investments in the UK are made through government approved schemes, which include;

  • ISAs
  • Pension Investments
  • BPR Investments
  • Venture Capital Trusts
  • SEIS Investments
  • EIS Investments
These schemes offer investors a range of tax reliefs and incentives. Download your free guide to find out more about the generous tax reliefs that are available.

1 ISAs

An ISA is a scheme that offers individuals the ability to grow their savings, which can be held in cash, shares and unit trusts, tax-free. These accounts are exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme. Ultimately, ISAs allow individuals to create a portfolio that’s sheltered from the taxman. ISA’s don’t need to be declared on tax returns and can be withdrawn whenever needed. The amount you can invest each tax year is decided by the government; for the 2017–18 tax year, the allowance was £20,000. In many cases, it costs no more to hold cash and investments inside an ISA than to hold them outside, so investors can receive these benefits for free. Since the income is not taxable it does not count for age-related personal income tax allowance reduction (although this age-related element is being phased out)

Types of ISAs

1. Cash ISA

A cash ISA is an account that pays interest tax-free, as opposed to savings accounts on which you would pay tax such as fixed rate bonds, notice savings accounts and easy access versions (above an annual tax-free allowance of £1,000). A cash ISA can include savings in bank and building society accounts, in addition to some national savings and investments products.

2. Stocks and Shares ISA

A stocks and shares ISA allows you to invest into a range of investments, such as government and corporate bonds, property and stocks and shares as part of your allowance. Stocks and shares ISA’s can include shares in companies, unit trusts and investment funds, corporate bonds and government bonds. Stocks and Shares ISA’s allows any gains to be tax efficient, helping you to save some tax depending on what investments you have and what levels of tax you pay.

3. Help to Buy ISA

The Help to Buy ISA is designed to help first-time buyers save money towards buying their first home. After an initial deposit of £1,000, you’ll receive a £50 bonus for every £200 saved, to a maximum bonus of £3,000. As with a standard ISA, any interest you earn will be tax free. Help to Buy ISAs are limited to one per person and any contributions count towards the individual annual limit (£20,000 in 2017-18)

4. Junior ISA

A Junior ISA is a method of being able to save money on behalf of your child and earn tax-free interest. There are two types of Junior ISA: cash, and stocks and shares. A child may have one or both types of Junior ISA, and there is no income tax nor capital gains tax payable on interest or investment earnings. Junior ISAs are available to any children under the age of 18 who are living in the UK. The child can take control of the account after they turn 16, but cannot withdraw money until the age of 18. The savings limit for Junior ISAs is £4,128 for the 2017/18 tax year.

2 Pension Investments

Individual tax relief on pension contributions is an established pillar of the UK personal taxation framework - it will actually celebrate its centenary in 2021, having first been introduced in the 1921 Finance Act. The intention of the tax incentive is to encourage you to defer cash whilst in work to fund a more comfortable retirement.

Two of the more innovative pension products - Small Self-Administered Schemes (SSASs) and Self-invested personal pensions (SIPPs) - are summarised below.

Types of pension investment

1. Small Self-Administered Schemes (SSASs)

SSASs were created specifically for SMEs and offer a range of features that appeal to business owners. A SSAS is a multiple member, collective single trust, with the ability to add up to 11 members. Within the scheme, each of these members has an individual notional fund, or pot. Contributions to individual funds are subject to the annual and lifetime contribution limits listed above. As well as these individual member funds, there is also the potential to create another fund within the SSAS – this is the General Unallocated Fund (GUF).

Subject to conditions, a SSAS can lend up to 50% of its net assets back to the sponsoring employer. Furthermore, a SSAS can lend up to 100% of its net assets to an unconnected party. A SSAS also has the widest range of investments available to any UK pension scheme, including shares in UK companies, HMRC-approved investments, and commercial property and land.

From a tax perspective, growth in the value of assets held in a SSAS are not subject to capital gains tax (CGT) and family members can become members of a SSAS to enable assets to be transferred without incurring inheritance tax (IHT).

2. Self-invested personal pensions (SIPPs)

SIPPs are a type of personal pension. They are an individual contract between you and the pension provider. However, SIPPs offer much wider investment powers than are generally available for personal pensions and group personal pensions. The wider investment powers can allow you to invest in a wide range of assets, including:

  • Quoted UK and overseas stocks and shares
  • Unlisted Shares
  • Collective investments (such as OEICs and unit trusts)
  • Investment trusts
  • Property and land (but not most residential property) insurance bonds.

A SIPP can also borrow money to purchase some investments. For example, a SIPP can raise a mortgage to part-fund the purchase of a property. Such properties would normally then be rented out and the rental income, received by the SIPP, can be used towards servicing the mortgage repayments and the costs of running the property. Not all SIPPs allow you to invest in the full range of allowable investments. SIPPs that hold specialist investments (such as property) may be liable to pay higher charges than schemes that hold ‘mainstream’ investments.

3 BPR Investments

Business Property Relief (BPR) has been an established part of inheritance tax legislation since 1976. And as an investment incentive, it’s relatively straightforward. Once BPR-qualifying shares have been owned for at least two years, they can be passed on free from inheritance tax on the death of the shareholder. Not every interest in a business will qualify for BPR. Broadly speaking, investments in the following kinds of businesses that carry on a trade rather that investment activities could qualify for BPR, including:

  • Shares in qualifying companies that are not listed on any stock exchange.
  • Shares in qualifying companies listed on the Alternative Investment Market (AIM).
  • An interest in a qualifying business, such as a partnership.

Most recently, since 2013 investors can hold AIM-listed shares within Individual Savings Accounts (ISAs). This means an ISA that invests specifically in AIM-listed companies expected to qualify for BPR can offer inheritance tax exemption as well as the traditional ISA benefits of tax-free income and capital growth.

4 Venture Capital Trusts

A venture capital trust or VCT is a highly tax efficient UK closed-end collective investment scheme designed to provide private equity capital for small expanding companies, and income (in the form of dividend distributions) and/or capital gains for investors. VCTs are a form of publicly traded private equity. VCTs are listed on the London Stock Exchange, which invest in other companies which are (mostly) not themselves listed. First introduced by the Conservative government in the Finance Act 1995 to encourage investment into new UK businesses, they have proved to be much less risky than originally anticipated.

5 SEIS Investments

The SEIS is a tax efficient investment scheme offers both income tax and capital gains tax relief to qualifying investors who wish to invest in qualifying companies. SEIS is designed to complement the EIS by helping small, early-stage companies raise equity finance. Shares must be held for three years from date of issue in order for relief to be retained in full. Investors can obtain 50% relief for income tax on the cost of shares, on a maximum annual investment of £100,000.

Visit our Seed Enterprise Investment Scheme page to find out more about the benefits of investing in SEIS opportunities

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6 EIS Investments

The EIS is a series of UK tax reliefs launched in 1994 to encourage investments in small, high-risk companies in the UK. Tax relief is 30% of the cost of the shares and is set against the investor’s income tax liability for the tax year in which the investment was made. Relief may be claimed up to a maximum of £1 million invested in shares, setting the maximum possible tax reduction at £300,000. A carry-back facility allows for part or all of the cost of the shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year, thereby securing relief for the earlier year.

Visit our Enterprise Investment Scheme page to find out more about the benefits of investing in EIS opportunities

DOWNLOAD YOUR FREE GUIDE

Watch on-demand:
An introduction to Tax Efficient Investing

In this 30 minute webinar, Michael Johnson (Head of Research, GCV) and Dan Smith (Head of Digital, GCV) gave a brilliant introduction to tax efficient investing, which covered:

What is tax efficient investing?

Three of the most notable tax efficient investing schemes

The generous tax reliefs available to investors

Finishing with a live Q&A, the webinar is a perfect introduction to tax efficient investing, providing all the information you need to make you fully aware of the immense benefits of investing in tax efficient initiatives within the UK.

EIS INVESTMENT OPPORTUNITIES

Here’s a selection of live offers open for investment. You can invest from as little as £100 and build a diversified investment portfolio.