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Typically, where there are profits to be made there is usually a government nearby looking to tax them. Here in the UK, investors face a nebulous tax system which often eats into returns due to poor planning. Here at Bure Valley Group, we offer this short guide on tax-efficient investing in the 2021-22 tax year – particularly for higher earners.
We hope you find this content useful, but please note that it is not financial advice.To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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Using allowances strategically
Here in the UK, the tax system allows residents to generate a certain amount of income and investment returns each tax year without getting taxed. Making the most of these “allowances” is a key part of a tax-efficient investment strategy. Capital gains, for instance, can be earned up to £12,300 before capital gains taxes (CGT) kick in; i.e. 28% on gains from residential property and 20% on gains from other chargeable assets, if you are a Higher Rate taxpayer.
One simple way to mitigate CGT, therefore, is simply to spread your gains across different tax years (assuming you can wait). If you make £20,000 of capital gains in a general investment account in 2021-22, then you could sell up to £12,300 and keep the rest invested until 2022-23. Another option for married couples and civil partners is to use your spouse’s CGT allowance.
In the example above, for instance, this could allow you to sell your remaining £6,700 of gains if you transfer ownership of them to your spouse and he/she then sells them (assuming they have not used their CGT allowance for the year). CGT transfers are generally tax-free although may be subject to company Articles and any Shareholders’ Agreements.
Using ISAs properly
In 2021-22 you can put up to £20,000 into your ISA(s) each tax year. Inside this tax-efficient “wrapper” you can generate interest, capital gains and dividends without attracting any tax. For investors, this presents an opportunity to construct a sizable, tax-free ISA portfolio over time; e.g. £200,000 over 10 years. However, many people make the mistake of not making full use of their ISA allowance – which is refreshed each tax year and does not let you “carry forward” any unused allowance – or they simply put cash inside rather than assets with higher potential for investment returns, such as equities.
One mistake often made by higher earners is not splitting their portfolio effectively between their general investment account (GIA) and their ISA(s). Bitcoin in 2021-22, for instance, cannot be owned directly in an ISA or a pension and must, therefore, be held in a GIA. Here, your crypto would be subject to CGT if sold at a profit above your £12,300 CGT allowance. Let’s assume, however, that you also hold a GIA full of shares which have also made a profit within the same tax year. Selling these and your Bitcoin gains in 2021-22 would incur a large CGT bill. Had you kept the equities in an ISA (where gains can be made tax-free) it may have been possible to sell both for a profit with little/no CGt incurred.
Using other tax-efficient vehicles
The aforementioned can be used by most higher earners resident in the UK. For the wealthier, however, it may also be appropriate to consider other options to mitigate a needless tax bill. In particular, investing in companies which qualify for the Enterprise Investment Scheme (EIS) is often a great idea option. Here, an investor can offset their risk by claiming up to 30% income tax relief on EIS investments (worth up to £1m in a given tax year). If you then hold your shares for at least three years and then sell them, any profit you make is 100% free of CGT – even if you have already used up your ISA and CGT allowance.
Another idea for business owners is to consider setting up a special purpose vehicle (SPV) for mitigating taxes on specific aspects of your portfolio. If you hold 10-20 Buy To Let properties, as an example, then the rental yield is subject to income tax (e.g. 40% as a Higher Rate taxpayer) unless you take steps to put them inside an appropriate business structure – such as SIC codes 68100, 68209 and/or 68320. Doing so would allow your rental yields to be subject to corporation tax, which at 19% in 2021-22 would likely be far lower than your income tax band. However, you should consider seeking financial advice before rushing to adjust your portfolio in this fashion. It could affect other aspects of your financial plan and limit your investment options in the future.
Technology companies can be a powerful addition to an investor’s portfolio. Given their volatility, however, make sure your asset mix reflects your investment goals, strategy and risk appetite.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827