5 TIPS FOR TAX EFFICIENCY BEYOND ISAS

Investment & Wealth Advice




How can I save efficiently once I have used up my ISA and pension allowances?

David Stead, Senior Private Banker

For those who want to save and invest in a tax-efficient manner, the two main vehicles are the individual savings account (ISA) and the self-invested personal pension (SIPP). The annual ISA allowance is a straightforward £20,000 per person. The annual pension allowance starts at £40,000, but depending on your level of income, can be as low as £4,000 a year, and that’s before you take into account the risk of breaching the Lifetime Allowance (currently £1.07m), the maximum you can have in your pension pot before triggering punitive tax charges.

So what are the options for savers and investors who have already exhausted these two routes? The good news is that there are a number of tax-efficient options worth investigating further.

1. Consider investing in early-stage companies

One option is to consider investing in Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS). These offer tax-efficient routes to investing in smaller, youthful companies that are not yet listed on mainstream stock exchanges (certain companies listed on London’s AIM market do qualify in some circumstances).

As you can imagine, such companies are high-risk, potentially illiquid investments, which require investors who can afford to be patient, who have the wherewithal to diversify their portfolios, and who have the capacity to stomach some potential losses along the way. 

To offset this, the tax reliefs available for those who invest in these companies are very generous, and the annual allowances are now significantly higher than for either pensions or ISAs. While the following provides an overview, the rules surrounding VCTs and EISs are complex and worth discussing with an advisor should you wish to explore further. 

2. Venture Capital Trusts (VCTs)

VCTs are investment trusts (funds listed on the stock exchange) which are run by professional managers who invest in qualifying companies. These companies are young (under seven years old), small (fewer than 250 employees), and must have gross assets of less than £15m. There are a range of VCTs available across various sectors, and several managers have long track records in the sector. 

Each year, it is possible to invest up to £200,000 in VCT shares that have been newly issued ((i.e. rather than buying from another investor via the stock exchange). Investors benefit from 30% tax relief upfront (offset against your income tax bill), as long as the shares are held for five years. Any dividends paid and any capital gains are tax free.

3. The Enterprise Investment Scheme (EIS)

For EIS, the tax reliefs are even more significant. It is possible to invest up to £1m (or £2m if at least £1m is invested in “knowledge-intensive” companies). EIS shares must be held for at least three years to qualify for the 30% upfront income tax relief. Investors can choose their own EIS investments, but there are specialists managers who will choose and run a portfolio of qualifying companies for you.

This 30% relief rises to 50% for Seed Enterprise Investment Schemes (SEIS), which involve even smaller, riskier companies – those that are no more than two years old, and employ no more than 25 staff. Note however, that the annual investment allowance for SEIS is £100,000.  

4. Inheritance tax, AIM and Business Property Relief

For those who want to mitigate future inheritance tax (IHT) liabilities, gifting assets is one option. However, there are two obvious downsides. One is that, beyond certain amounts and certain types of asset, a gift remains at least partially in your estate until you have lived for seven years beyond the date of the gift. Another is that, once gifted, you no longer own the asset, which may present problems if you end up requiring the money after all. 

One option which enables you to keep control of your money while removing it from your estate for IHT purposes much more rapidly, is to invest in assets that benefit from Business Property Relief (BPR). BPR-qualifying assets held in your estate do not count for IHT purposes as long as they have been held for at least two years at the time of death. A number of assets qualify, but the most accessible for those who do not own a family business or a farm, may be certain companies listed on AIM, London Stock Exchange’s junior market.

Bear in mind that AIM stocks tend to be more volatile than larger companies, so as with VCTs and EIS, make sure that this option is compatible with your risk tolerance. And note that not all AIM stocks qualify for BPR and there is no explicit list of those which do and do not, so it’s worth taking specialist advice if you decide to go down the route of choosing a portfolio of these stocks.

5. Investing for future generations

If you want to save on the behalf of future generations, then you can invest into a tax-efficient Junior ISA (JISA) on the behalf of your children or grandchildren. This year the annual allowance is now £9,000. The money is locked away until the child turns 18, at which point he or she gains full control of the pot. It’s also possible to contribute to a pension for a child. You can put up to £2,880 into the pension, and basic rate tax relief will increase that to £3,600. As the rules presently stand, this is locked up until the recipient turns 55. 

Is it time for an independent investment review?

At Weatherbys Private bank, we offer financial planning and investment advice.

Tax efficiency may feel like an administrative headache, but it can make a significant difference to your long-term finances – and unlike your rate of investment return, it is well within your control. Do bear in mind that all legislation around tax-efficient investing (including pensions and ISAs) is subject to change and it is important to stay abreast of current rules, and consider how they impact your plans. Do get in touch with our Investment & Wealth Advice team today to find out if we can help you plan for the future.

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Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

Tax laws are subject to change and taxation will vary depending on individual circumstances.

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