Bear in mind that one should not invest for tax reasons alone, and that your risk profile for the type of investments invested in must be most suitable for you. Always seek professional advice, if necessary.
Tax Free Investments
Individual Savings Accounts (ISAs) - The investment grows tax free and is easily accessible. Income and capital gains are tax free. The annual allowance for this tax year is £10,680 per person. Of this £5,340 can be in a cash ISA, leaving £5,340 in an investment ISA (or the whole amount of £10,680 in an investment ISA). A couple can invest £21,360 free from tax. The new junior ISA for children has a maximum investment of £3,600 per annum and can be invested by a parent for the child (but there is no access until age 18 on this one).
National Savings Certificates – these grow tax free but no issues are currently available. Only Children’s Bonus Bonds issue 34 paying 2.5% annual equivalent rate are available,
Forestry and Woodlands – there is no tax on harvested timber, and no capital gains tax on in the growth in value of the timber crop. IHT reliefs are available after 2 years.
Pensions – anyone can contribute to a pension plan up to age 75. The fund grows tax free and when the fund matures (from age 55), 25% can be in tax free cash and the balance buys a taxable pension or annuity. You can contribute 100% of salary up to £50,000 per tax year. All contributors receive 20% on each contribution from HMRC. Higher rate taxpayers can claim an additional 20% relief and additional rate taxpayers 30% tax relief through their tax returns. Non-taxpayers can contribute up to £3,600 gross (i.e. £2,880 net). For savers, HMRC guarantees a minimum 20% return on each contribution made. Carry forward reliefs allow for additional contributions to be made, using unused relief going back up to three tax years, if you qualify.
Friendly Society investments – each member of the family can contribute £25 per month or £270 per annum into a tax favoured endowment type fund. Maturities are tax free after ten years.
Always diversify your investments to spread your risk. Turn taxable investments into tax free ones or make sure you use your personal allowances effectively. Some investments also give IHT reliefs – so plan accordingly.
Tax –Reducing Investments
Venture Capital Trusts (VCTs) – This is like a big ISA which is tax deductible. The maximum contribution is £200,000 per person and 30% of the investment reduces your tax bill. Income is tax free and there is no capital gains tax on gains. The VCT shares must be held for 5 years to maintain the tax reliefs. Minimum age is 18. The minimum contribution is around £3,000. The investment is higher risk as it invests into unquoted companies and can be illiquid if you need access to your cash.
Enterprise Investment Schemes – (EIS) – these are investments into unquoted qualifying companies (small businesses and some AIM stocks). Individuals can invest up to £500,000 in this tax year, and 30% of the investment reduces your tax bill. You can effectively backdate tax relief to the previous tax year. You must hold the shares for at least 3 years to maintain tax reliefs. This type of investment is very high risk but HMRC offers generous tax incentives. There is no CGT on any growth in value of the shares, but dividends are taxable. After two years, the shares are generally free of IHT. If the investment makes a loss, there are loss reliefs. Capital gains on other assets can be deferred through an EIS and you can choose when to crystallise the capital gain. You do not need to be tax resident (merely have a UK income tax liability) to claim the relief.
Taxable but Tax Efficient
You may make taxable investments where the interest or capital gains are taxable. However, you have personal allowances to offset against these gains annually. Personal allowances for taxable interest or dividends range from £7,475 (to age 65), £9,940 (65-74) and £10,090 (75+). Capital gains tax allowances are £10,600 for individuals and half that for most trusts.
Practical Tip :
You can make your capital gains tax free by cashing in gains up to your annual allowance in the tax year.
After £100,000 taxable income you progressively lose your personal allowance. Income is taxable at an effective rate of 60% between £100,000 and £114,950. A pension contribution could reduce your taxable income back to the level where you retain personal allowances.
Similarly you can beat the age allowance trap. If you have taxable income over £24,000 and are over age 65, your personal allowance reduces on a one for one basis to the basic personal allowance. Pension contributions or tax free income investments should be considered.