Tax-efficient Investments

Tax-efficient investments are government-approved schemes that provide investors tax relief on investments into qualifying companies or investment plans. Create can advise on strategies to help manage, defer, and reduce taxes ...

All UK citizens can start open an ISA and start saving as soon as they are sixteen years old. Junior ISAs allow adults to open ISAs for their children and put cash, stocks, and shares away until their child comes of age.

In 2016, the government rolled out a new version of tax efficient investments - the Flexible Individual Savings Account (Flexible ISA). Similar to cash ISAs, the Flexible ISA allows investors to withdraw money from their account and return it in the same tax year without reducing their tax free allowance.

As a tax efficient investment scheme, the EIS offers investors a number of tax related benefits. The primary benefit is that the EIS investor will receive income tax relief of up to 30% on their investment, which saves a significant amount of money that would have otherwise been spent on tax. This means that should an investor put up £1 million into an EIS they may claim tax relief for 30% of shares purchased. This would therefore result in a maximum tax reduction of £300,000.

Another key benefit of tax efficient investments is that there is no capital gains tax applied to the sale of any shares that the investor sells. Under certain conditions, investors can defer capital gains until a tax year when they retire, or a time when they are paying lower tax rates.

A further main benefit of this type of tax efficient investment is that investors won’t be required to pay any inheritance tax on profits made from the investment, as long as the investor remains as such for a two-year period.

Socially responsible Investments

Investors can now back progressive companies that are helping shape a better world and conduct business in a better way, through impact investing and environmental, social and governance (ESG) factors.

Investments for children

If you want to give your children financial help, say with university fees, buying their first car or home, there are a number of tax-efficient investment options

It is important to remember that any investment held in your children’s names legally becomes theirs at the age of eighteen to do with as they wish. This may not always be the best age to receive a large lump sum of money. An alternative could be to set up a discretionary trust. Setting up such trusts can incur hefty legal and administrative costs though, so these are better suited to those with significant property and/or funds to bequeath, rather than the regular saver.

Investments for Trusts

Investment trusts are public limited companies that aim to make returns from investing in other companies. Owning shares in such a trust is a way to invest in a variety of different companies.

The company’s shareholders elect a board of directors to monitor the company’s performance and look after the shareholder’s interests. In turn the board selects a professional portfolio manager to manage the company’s investments.

What investment trusts offer

You could take some of your pension as a lump sum, you can look to buy an annuity with your money, or you can use the new flexible-access drawdown arrangements available as a as a result of the Freedom of Pensions Act.

On the whole these types of socially responsible investments can be broken down into four main categories as follows:

Business Investments

We can advise business owners on tax-efficient investment strategies including the structuring of income, pension contributions, and also other investment options such as property investments, venture capital trusts, and enterprise investment schemes for surplus funds.

The remaining alternative is to leave all the profits in the business which are then taken from the subsequent sale of the business. What determines the best route is the net benefit to the business owner in terms of how they structure their income to minimise tax payments and maximise tax benefits. Our advisers can help business owners identify and improve on efficiencies achieved within areas such as business investment and profit extraction. This is usually achieved in a combination of ways.

For example, should you as the business owner take a minimum income and leave value to build up in the business? This may minimise the tax bill, but accumulating money in the business leaves the issue of what best to do with the money while it remains in the business. Alternatively do you take out the value regularly and pay a greater amount to the tax man. Which is better, salary or dividends, another alternative all together.

Another method of extracting value from a business is of course using a pension, which given the introduction of ‘pension freedom’ in 2015 is now even more attractive to business owners.

As with most things putting all your eggs in one basket is never the best approach, so it is usually better to employ a combination of the methods noted above. For example, leaving some profits in the business for cash flow, an optimal mix of salary and dividends, and pension contributions to further improve tax efficiency.