5th September 2019
Mention tax efficient investing and the first product which will most likely spring to mind is the Individual Savings Account, or ISA. And that’s not surprising given the popularity of this investment vehicle. In fact in the 2017/18 tax year, the latest for which figures are available, in the UK we collectively invested £69billion across 10.8 million adult ISAs. Cash ISAs accounted for 72% of the take up with stocks and shares ISAs accounting for the majority of the rest. In addition Junior ISA subscriptions netted £902million.
Notwithstanding the popularity of ISAs, they are not the only tax-efficient investment vehicle. So let’s take a quick look at some of the other options starting with pensions. Just as with ISAs, the amount you put into your pension each year is subject to certain limitations. However, unlike ISAs, it can be possible to make use of the previous three years’ allowance, as long as you meet the qualifying criteria. Tax relief on contributions is generally calculated based on an individual’s tax rate up to a maximum of £40,000 per year; however higher earners should be aware that they may be subject to a tapered annual allowance. For some individuals, pension contributions could not only be tax efficient but also aid inheritance tax planning.
Venture Capital Trusts (VCT) represent another potentially tax efficient investment vehicle. VCTs are run by a fund manager who invests mainly in small unquoted companies. As such these investments are seen as higher risk so although VCT investments can be tax efficient they are not recommended for those who are risk-averse. Equally, as any income tax relief provided on the take up of new VCTs is clawed back if the VCT is sold within five years, they should generally be viewed as a long term investment. Nevertheless as VCT dividends don’t attract income tax and there is no capital gains tax to pay on sale, for some VCTs can be a tax efficient investment vehicle.
Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) are broadly similar to VCTs but each are subject to different investment, income tax and capital gains tax regulations. Because of this it is important that any decision to invest in a VCT, EIS or SEIS takes account of an individual’s overall tax, income and financial situation.
In highlighting the importance of investment choices being subject to individual circumstances Thompson Jenner Financial Services Director Neil Sear commented “tax efficient investing can help to reduce income, capital gains and inheritance tax.” Adding “The varied nature of each investment vehicle enables us to recommend a portfolio of investments which best matches the personal needs and risk appetite of each of our clients.”
If you would like to find out more or meet to discuss VCTs or any Devon Financial Services advice which we are able to provide, please contact Neil Sear at either our Exeter or Exmouth office on 01392 258553 or 01395 279521 to arrange a free initial meeting.