Tax-efficient investment vehicles, at a glance

Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice. 

How can you invest tax-efficiently? After all, taxes eat into your returns and affect how much is left for yourself. In this guide, we will share five UK-based investment “vehicles” that investors can use to mitigate needless taxes in 2022-23.

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ISAs

Under tax rules in 2022-23, you can put up to £20,000 into your ISA(s) each tax year. This can all be put into one ISA – such as a Cash ISA. Or, can be spread across multiple types. As an example, you might put £5,000 into a Stocks & Shares ISA, £5,000 into a Cash ISA and the rest into an Innovative Finance ISA. 

There is no “total cap” on how much you can save into your ISAs. Over time, therefore, you can theoretically build a sizable ISA portfolio. Any capital gains, dividends and interest generated in your account(s) will be tax-free. However, bear in mind that ISAs are not exempt from IHT (inheritance tax) except in specific cases (e.g. AIM shares which qualify for Business Relief).

Any unused ISA allowance is lost at the end of the tax year. 

Pensions

You can put up to £40,000 into your pension pot(s) each tax year under the “annual allowance” rules. Or, up to 100% of your earnings for the year – whichever is lower. Here, you have a bit more flexibility than an ISA since you can “carry forward” any unused allowance from the prior three tax years when contributing.

There is a total “cap” on how much you can save into pensions, however, called the Lifetime Allowance (set at £1,073,100 for the coming years). Any lump sums taken above this risk a 55% tax charge, and anything taken as income is taxed at 25%. Therefore, be careful that you will not inadvertently breach this threshold due to “excessive” pension growth.

In 2022, you can start accessing pension pots from age 55. However, this is expected to rise to 57 in the future. If you need the money sooner, then you may need to include other tax-efficient investment vehicles with no age restriction in your financial plan.

Pension pots are free from IHT upon death. However, beneficiaries may need to add any funds received to their income tax bill.

EIS

The Enterprise Investment Scheme (EIS) can be a great option for those who have an interest in early-stage companies – prepared to take on some higher risk, in exchange for the chance of “higher reward”. Each tax year you can invest up to £1m into EIS-qualifying companies; or, £2m into those accepted as “knowledge intensive”.

Tax relief of 30% can be claimed on EIS investments up to £1m. Moreover, capital gains from EIS shares are free from tax if held for at least three years. Capital gains tax (CGT) can also be deferred if gains are reinvested into EIS shares. 

You can also offset losses on EIS shares at your highest rate of income tax (e.g. 45% for those on the additional rate). Finally, IHT does not apply on EIS shares held for at least two years.

 

SEIS

The Seed Enterprise Investment Scheme (SEIS) is very similar to EIS, but with a more specific focus on smaller startup companies. You can invest up to £100,000 into SEIS companies each tax year, and the amount you invest can receive 50% tax relief (regardless of marginal rate).

SEIS capital gains cannot be deferred, but you can halve the capital gains tax you owe when reinvesting gains into an SEIS company. Loss relief is also available on exit, and SEIS shares are also exempt from IHT if held for a minimum period.

 

VCTs

A VCT (venture capital trust) is a type of publicly-listed company which you can invest in, also receiving generous tax breaks. A VCT will then invest the money it is handed into companies which meet relevant criteria – typically those which are privately owned. 

As such, when you invest in a VCT you do not hold shares in the investments of the company but the VCT itself. There are different types of VCT which may be more/less relevant to you depending on your goals, risk tolerance and wider strategy (e.g. “AIM” VCTs”). 

You can invest up to £200,000 into VCTs each tax year. Most VCTs will require a minimum investment of £5,000. Here, investors get 30% up-front income tax relief and other perks such as tax-free investment growth. They also offer dividends free from tax, which can form the majority of returns for VCT investors (making them an interesting retirement planning option).

 

Invitation

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