Are your Investments Tax Efficient?
Ensure you are making the most of your investments by learning the most tax efficient way to invest your money. Opting for a tax-efficient investment means that you are likely to be able to keep a higher percentage of any returns you make.
It is important to remember that in future tax rules could change, affecting the tax efficiency of your chosen investment scheme, so your investments need to be kept under review. Also you will need to bear in mind that your individual circumstances will affect the way in which any tax benefits are applied.
Here we discuss six possible tax efficient options for your money:
Employer Share Schemes
Some employers are now offering their employees a share scheme as part of their employee benefits. There are usually price discounts and tax breaks for taking part.
Save As You Earn (SAYE) is a savings-related share scheme which gives you the opportunity to buy shares with your savings for a fixed price. Under a SAYE scheme you can save up to £500 a month for a fixed contract of usually 3-5 years. At the end of the contract you then have the option to use your savings to buy shares.
One tax advantage of a SAYE scheme is that any interest or bonuses due at the end of a scheme are tax free. Another is that Income Tax and National Insurance are not payable on the difference between what the shares are worth and what you originally paid for them.
If you decide to sell the shares you may have to pay Capital Gains Tax. However if as soon as you buy the shares you put them into an Individual Savings Account (ISA) or pension you will not need to pay Capital Gains Tax.
Another arrangement offered by some employers is the Share Incentive Plan (SIP). Under this arrangement employers can either give or sell shares to their employees immediately. The shares are kept in a trust for you until you decide to take the shares from the plan or until you leave your job. To benefit from the full tax breaks shares must be kept in the plan for at least three years.
If your company offers either of these then you should definitely consider taking part. You will need to plan to use annual contribution limits, managing share purchases so that there is a steady flow of potential share sales in future tax years. This will allow you to maximise the use of your annual capital gains exemption.
We recommend obtaining professional advice before entering into any employer share schemes.
Insurance Backed Investment Bonds (Onshore)
This type of investment allows you to withdraw 100% capital over 20 years, withdrawing 5% at a time without paying any income tax. You will only pay income tax on the growth of your original investment, when you exceed 100% of the original investment.
So if for example you invest £100,000 you will be able to withdraw £5,000 a year over 20 years. Therefore at the end of the 20 year period you will have withdrawn your original £100,000 and will be left with just the growth. The growth will then only be subject to income tax if you are a higher rate tax payer.
So this type of investment can be particularly beneficial for those looking for additional income and/or are in a higher rate tax bracket now but expect to pay only basic rate tax later.
Offshore Bonds
Offshore bonds are investment wrappers that are offered by a life insurance company operating in a jurisdiction where there is favourable tax regime, such as the Isle of Man.
The main benefit of an offshore bond is that it offers you the flexibility to defer tax to a year that is more favourable. This could be a year when your other income is lower, for example when you are not a tax-resident in the UK.
To find out more about offshore bonds and if they are suitable for your investments we recommend undertaking professional financial advice.
Individual Savings Accounts (ISAs)
With an ISA you are able to save up to £15,240 tax free while parents can also save for their children in a Junior ISA or Child Trust Fund with a tax free limit of £4,080.
You can choose how you save by either splitting your allowance between cash ISAs or stock and shares ISAs or by just putting all into one type of ISA.
The government has recently introduced the ‘Help-to-buy ISA’ which aims to help first time buyers save for a deposit. Income and capital gains from ISAs are tax-free, while withdrawals from adult ISAs do not affect tax relief.
Pensions
Pensions are an attractive, tax-efficient way to invest your money for the future; as money invested in pensions obtains tax relief and is able to grow without being subjected to income tax or capital gains.
When the time comes for you to take your pension you are able to draw 25% tax free, with the remaining 75% taxed at a marginal rate which, depending on your income when drawing your pension, can be lower than the rate of tax relief you received.
VCT and EIS
Venture Capital Trusts (VCTs) and Enterprise Investment Scheme (EIS) offer tax relief on the amount invested.
VCT and EIS give people the chance to benefit from investing in small expanding companies. They both carry higher risk than other investments we have discussed, however they are well worth mentioning as they can include some or other of the following:
- Income Tax Relief
- Capital Gains Tax Deferment
- Tax Free Dividends
- Inheritance Tax Mitigation
An adviser at KDW will be able to discuss any of the investment options we have discussed in this article and the tax implications. Any advice we give is completely impartial. For a free, no obligation consultation, please contact us today.
Tel: 01727 85 22 99 Email: investments@kdw.co.uk
Please Note: Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation are subject to change. The value of investments and income from them may go down. You may not get back the original amount invested. Past performance is not a reliable indicator of future performance.