That's a wrap

Investment & Wealth Advice

Choosing a wrapper that best fits your financial plans

Clare Munro, Senior Tax Adviser

We all know about wrapping gifts or parcels, but what about tax wrappers?  What are they, do they help save tax and should you be using one?  If so which?

What is a tax wrapper?

‘Tax wrapper’ has no official meaning but is a phrase that has come to cover any structure which changes the tax consequences of the underlying activity or investment.  Usually the change is for the better, so the effect is to wrap the investment in a protective shield.

The tax consequences of any situation are driven by the legal structure in which it sits.  So, for example, the tax consequences of income or gains within a company are different from the tax consequences of the same income or gains made by an individual.  On a very basic level, the company is therefore a wrapper which changes the tax outcome for a shareholder.  Obviously, a limited company does other things too, but the family or personal investment company has become increasingly popular as a tax wrapper to utilise more beneficial corporate tax rates.

Which wrapper is right for me?

The most well-known tax-incentivised wrappers are pensions and ISAs, both of which benefit from tax-free investment returns.  Pensions have additional benefits, particularly since liberalisation of pensions in 2015, so there is no longer any requirement to purchase an annuity, the fund can be passed on free of IHT (albeit with other tax consequences) and 25% of the fund can still be taken tax free.  All this in addition to up-front tax relief.

So, on the face of it, the pension fund looks like the superior wrapper.  However, fund access is limited to over 55s and the ability to contribute with tax relief is restricted by the Annual Allowance (£40,000 tapering to £4,000 for the highest earners) and by the Lifetime Allowance, which caps an individual’s total pension savings at £1,073,000 in 2020/21. 

By contrast, ISAs have a lower annual contribution limit of £20k but have no Lifetime Allowance equivalent, and free access to the accumulated fund, a feature which could be useful for those trying to fund mortgages or school fees.

Maxed out pensions?

If you have maximised contributions to pensions and ISAs, other tax wrappers for longer term savings and investments are available.  Investment bonds, written in the form of a life policy, are non-income producing.  If established offshore, they can provide a useful form of deferral for tax purposes whilst still allowing some access to the capital via annual withdrawals of up to 5% of the original bond. 

Moving up the risk scale, the government provides tax reliefs for those who invest in start-up trading companies. Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide tax reducers of 30% and 50% respectively of the sum subscribed for new shares, together with exemptions from tax on dividends and gains.  In common with other tax wrappers, there is a time commitment (3 years) and an approval certificate is required before the relief is given.   

Weighing up the benefits

Tax incentives can be tempting and it’s easy to ignore investment risks in the search for tax relief.  After all, if the government will provide 50% cashback on an SEIS investment, isn’t that like getting £1 for 50p?  In fact, tax incentives are rarely the whole story and, like any investment, one should understand the nature of the underlying investment and assess its prospects. 

As for wrappers, some - like registered pensions – are designed for universal use.  Others are more niche, so it really is a matter of choosing the wrapper that best fits your own circumstances and financial aims.  Of course, you need to understand the rules for any tax wrapper you use in order to reap the benefits and avoid nasty surprises.  Finally, the law can and does change from time to time so we should always keep investment structures under review. 

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.


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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