Tax-efficient investing: what it is and why it’s important

Tax-efficient investing

These are very complex and high-risk investments. We recommend seeking financial advice on tax and associated risks before entering into this type of investment. This information does not constitute advice or recommendation

You may or may not know that one of the most tax-efficient products to put your capital into, aside from an ISA, is that of a pension scheme. The annual tax-free allowance for pensions is currently £40,000, unless you’re a high earner on over £200,000 per year. If this is the case then your annual allowance may gradually reduce to as low as £4,000 over the course of the year[1].

However, if you’ve maxed out your annual allowance or you want to find additional tax efficient investment options, there are other routes to go down. Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EISs) are alternative choices to saving your money in a pension or ISA; although it must be said they’re options best reserved only for when you’ve reached the limit on your annual allowance.

Boosting the economy

These tax efficient investment schemes were created by the UK Government to encourage investment in start-ups and early-stage businesses, which is why there are a multitude of relief options potentially available. The reasons people invest in them vary greatly from wanting to play an active part in boosting British industry to purely financial reasons.

Many larger household-name businesses may have started off as one of the fledgling companies looking for investment today. However, as a high-risk option, the nuances around these opportunities need to be fully understood before deciding to go down such a route.

Enterprise Investment Schemes

With an EIS you’re able to invest up to £1 million in small, unlisted fledgling businesses. There is an exception for what are known as ‘knowledge intensive companies’, in which up to £2 million can be invested. You can claim income tax relief of 30% on the amount invested, but you must hold the shares for a minimum of three years.

Initiatives like disposal relief, whereby you won’t pay Capital Gains Tax (CGT) on any gains made when you come to sell shares, and inheritance tax exemption if the shares have been held for two years, may also be available through an EIS. There may also be an option to defer CGT for three years during the investment period.

Venture Capital Trusts

A VCT investment involves putting money into Aim listed stocks and other small, fledgling companies. VCTs may present slightly less risk than an EIS due to investing in a range of companies in a trust, as opposed to an individual company. However, both options are usually run on a high risk, high reward basis. The maximum that you can invest is £200,000 and this comes with a 30% income tax relief on the amount invested.

So figuratively speaking, if you invest £100,000, you could get £30,000 back in relief to offset your tax bill. There is also no CGT on VCT gains. That said, there is little liquidity, with the amount invested needing to stay put for five years.  

Whatever path you decide to pursue it’s important to discuss your preferences and attitude to risk openly with your Adviser; only then will they be able to research the best possible option for you.

To find out more about tax efficient investing, please get in touch today.

Source 1

Brunsdon Financial is not responsible for the content of third-party web sites.

The information provided regarding tax treatment or legislation is based on our understanding of current UK legislation law, tax law and HM Revenue and Customs practice (September 2021), all of which may be subject to change. The Financial Conduct Authority does not regulate tax advice and estate planning. Brunsdon Financial is not responsible for the content of third-party web sites.

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.

Enterprise Investment Schemes (EISs) are very high-risk investments. An EIS investment is usually concentrated in one single unquoted trading company. Often there is no market for the shares and it may therefore be very difficult to make a disposal. There is a strong possibility of the chosen company failing.

Investments can fall as well as rise, irrespective of the level of risk chosen, and the value of an investment and any income generated from it cannot be guaranteed and can fall as well as rise as a result of market volatility. You may not get back the amount you originally invested.

The information provided does not constitute advice or recommendation. Pension funds can fall as well as rise, irrespective of the level of risk chosen, and the value of a pension and any income generated from it cannot be guaranteed and can fall as well as rise as a result of market volatility. You may not get back the amount you originally invested.

Tax-efficient investing

Tax-efficient investing: what it is and why it’s important

These are very complex and high-risk investments. We recommend seeking financial advice on tax and associated risks before entering into this type of investment. This information does not constitute advice or recommendation

You may or may not know that one of the most tax-efficient products to put your capital into, aside from an ISA, is that of a pension scheme. The annual tax-free allowance for pensions is currently £40,000, unless you’re a high earner on over £200,000 per year. If this is the case then your annual allowance may gradually reduce to as low as £4,000 over the course of the year[1].

However, if you’ve maxed out your annual allowance or you want to find additional tax efficient investment options, there are other routes to go down. Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EISs) are alternative choices to saving your money in a pension or ISA; although it must be said they’re options best reserved only for when you’ve reached the limit on your annual allowance.

Boosting the economy

These tax efficient investment schemes were created by the UK Government to encourage investment in start-ups and early-stage businesses, which is why there are a multitude of relief options potentially available. The reasons people invest in them vary greatly from wanting to play an active part in boosting British industry to purely financial reasons.

Many larger household-name businesses may have started off as one of the fledgling companies looking for investment today. However, as a high-risk option, the nuances around these opportunities need to be fully understood before deciding to go down such a route.

Enterprise Investment Schemes

With an EIS you’re able to invest up to £1 million in small, unlisted fledgling businesses. There is an exception for what are known as ‘knowledge intensive companies’, in which up to £2 million can be invested. You can claim income tax relief of 30% on the amount invested, but you must hold the shares for a minimum of three years.

Initiatives like disposal relief, whereby you won’t pay Capital Gains Tax (CGT) on any gains made when you come to sell shares, and inheritance tax exemption if the shares have been held for two years, may also be available through an EIS. There may also be an option to defer CGT for three years during the investment period.

Venture Capital Trusts

A VCT investment involves putting money into Aim listed stocks and other small, fledgling companies. VCTs may present slightly less risk than an EIS due to investing in a range of companies in a trust, as opposed to an individual company. However, both options are usually run on a high risk, high reward basis. The maximum that you can invest is £200,000 and this comes with a 30% income tax relief on the amount invested.

So figuratively speaking, if you invest £100,000, you could get £30,000 back in relief to offset your tax bill. There is also no CGT on VCT gains. That said, there is little liquidity, with the amount invested needing to stay put for five years.  

Whatever path you decide to pursue it’s important to discuss your preferences and attitude to risk openly with your Adviser; only then will they be able to research the best possible option for you.

To find out more about tax efficient investing, please get in touch today.

Source 1

Brunsdon Financial is not responsible for the content of third-party web sites.

The information provided regarding tax treatment or legislation is based on our understanding of current UK legislation law, tax law and HM Revenue and Customs practice (September 2021), all of which may be subject to change. The Financial Conduct Authority does not regulate tax advice and estate planning. Brunsdon Financial is not responsible for the content of third-party web sites.

VCTs are high risk investments and there may be no market for the shares should you wish to dispose of them. You may lose your capital.

Enterprise Investment Schemes (EISs) are very high-risk investments. An EIS investment is usually concentrated in one single unquoted trading company. Often there is no market for the shares and it may therefore be very difficult to make a disposal. There is a strong possibility of the chosen company failing.

Investments can fall as well as rise, irrespective of the level of risk chosen, and the value of an investment and any income generated from it cannot be guaranteed and can fall as well as rise as a result of market volatility. You may not get back the amount you originally invested.

The information provided does not constitute advice or recommendation. Pension funds can fall as well as rise, irrespective of the level of risk chosen, and the value of a pension and any income generated from it cannot be guaranteed and can fall as well as rise as a result of market volatility. You may not get back the amount you originally invested.

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