How to be tax efficient in your investments?

One of the most important components of a wealth portfolio is efficient tax planning. But, in 2023, the tax sands are shifting – and it’s easy to get swallowed under.

Under-pressure governments rarely resist tinkering with taxes.

Will Rishi Sunak’s be any different? They have little room in public borrowing – with the national debt at 102% of UK gross domestic product[i] – so they might think about their other lever for raising money. Some newspapers are already talking of an inheritance tax raid[ii].

But let’s leave the political speculation to others – because our expertise lies in spotting the most effective methods of managing our clients’ tax affairs.

In some cases, this means maximising the most obvious opportunities – in others, it involves finding underused or hard-to-see vehicles. They can all add considerable value.

So, if you’re worried about your potential tax liability, if you want to make the most of tax efficient opportunities, or if you think your tax affairs need optimising, please read on.

Tax building blocks

The foundation stones for tax strategies are pretty commonly known.

But it’s always worth restating them, to ensure nothing gets left by the wayside:

• ISA and pension allowances (with the former still at £20,000, per person)
• capital gains tax allowance (known as bed & ISA – because you sell an asset from a tax inefficient account and immediately buy it in a tax efficient account),
• your gifting allowance to avoid inheritance tax (a handy £3,000 annually),
• and investing in venture capital trusts (VCT) and enterprise investment schemes (EIS) for high earners.

Pitfalls to avoid

Cash can appear attractive in uncertain times. And 2023 is no exception. This is often driven by the fear of losing money.

But, if you think about it, as inflation is racing away from interest rates – 9.3% at the time of writing – holding cash is now a pretty good way of losing a lot of money, in short order.

For anyone sitting on cash, and earning unimpressive rates, we would also suggest:

• putting it into a pension and making the most of tax relief and, in the case of company pensions, matching employer contributions (which is essentially free money),
• considering ISAs and junior ISAs for children,
• and gifting or investing in business property relief-qualifying assets – because this is a way to claim inheritance tax relief (at 40%) on assets you already own.

Cash directed towards more remunerative, tax efficient places can offer a joint benefit.

For a start, tax saved is essentially an instant return on investment.

And history says that if your money is in a stock market-based investment, you get a far higher return than you would on cash, over the long run.

What’s different this year

As the tax year changes overnight on 5-6 April, we’ll see an important shift, likely to affect many wealth management clients.

The capital gains tax allowance is tumbling down from £12,300 to £6,000[v].

A year later it halves again, down to £3,000.

This means more people will pay CGT on gains that exceed their allowance.

So, if your assets are not wrapped for tax efficiency (such as a general investment account, directly held shares, or equity compensation in their company) you might want to consider selling up and moving capital into ISAs, pensions, and some of the other opportunities, above.

Two of them tend to be underused.

And it’s puzzling because they are very effective methods of managing tax liabilities.

VCTs and EISs are both long-standing methods of encouraging more money into smaller, fast-growing companies.

There are some technical differences between the two but, in practice, if you’re a business owner, they are very handy indeed. What you do is, take a gross dividend from profits and pay this into VCT/EIS investments to save 30% tax. For anyone paying higher rate (33.75%) or additional rate (39.35%) they can be extremely helpful channels through which to extract profits.

Tax and wellbeing

Everyone wants to know their money is going to be okay – and that they’re on track to progress towards financial wellbeing.

Tax can easily turn that financial journey into a challenging obstacle course.

But there are plenty of ways to navigate each obstacle – even if they get more difficult, as with the CGT changes this year. You just need to know exactly what to do, and when.

[i] https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/bulletins/ukgovernmentdebtanddeficitforeurostatmaast/june2022

[ii] https://www.telegraph.co.uk/money/tax/inheritance/hmrc-targets-bereaved-families-raid-inheritance-tax/

[iii] https://www.ons.gov.uk/economy/inflationandpriceindices

[iv] https://www.bankofengland.co.uk/knowledgebank/what-are-interest-rates

[v] https://www.gov.uk/government/publications/reducing-the-annual-exempt-amount-for-capital-gains-tax/capital-gains-tax-annual-exempt-amount

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.