How do you invest tax efficiently?

Haines Watts Tax Advisory Director Nici Goldsmith discusses options available to you to make sure you are making your money work for you.

There have been a number of changes over the last few years for individuals which are likely to have had an impact the tax efficiency your investments. These changes include:

• Individual landlords can no longer claim mortgage interest relief, only a basic rate deduction for the interest.
• Annual exempt amounts for capital gains and dividends have been cut from £12,300 to £3,000 within two years.
• The dividends exemption has been slashed from £2,000 per annum to £500 in two years.
• Personal allowances and savings allowances have been fixed until April 2028, bringing more and more people into the tax net.

Managing your portfolio through a company

Existing portfolios

Family investment companies in general can be a useful vessel to manage your portfolio through. Whilst you cannot pay dividends to minor children without these being taxed on you personally, dividends from a Family Investment Company (FIC) can fund their higher education.

Having family members and children as shareholders can allow you to extract growth from your estate, so can help minimise inheritance tax. A FIC can also be used to teach the children about governance of the family money, particularly if it has a more diverse investment portfolio.

Individual family members who hold shares can receive dividends from post-tax profit, and individuals working in the company can receive a company pension contribution, as long as such payments are commensurate with the work they do for the company.

Should you wish to speak to an expert regarding advice on a Family Investment Company, contact us today. 

New portfolios

If you are thinking of starting a property portfolio, and you do not already own the property, consider incorporating a company first. Companies can still claim full mortgage interest relief against profits. Bear in mind, however, that whilst it is cheap to set up a company, they are not necessarily cheap to run.

A company for one property may not be cost-effective. If you are thinking of having a portfolio, however, and particularly if you will be using finance, this may work. The advantages of FICs can all apply here. These structures are more efficient where a long term view is taken as property prices tend to move upwards and any gain on a future sale would be taxable at lower corporation tax rates, rather than the higher individual rates (currently 18% at the lower rate 24% at higher rates).

Succession is easier to consider as any gift or transfer would relate to company shares rather than a share in a property, which is often expensive due to stamp duty (if there is finance).  It also means ownership of the property does not become fractured over time in the same way as if a property is held directly.

It is important to seek expert advice before creating a property portfolio. Contact one of our experts today. 

Utilising ISAs

The amounts that can be invested in these have not changed, and probably will not change now until April 2028. However, if money can be invested in these, the returns, both income and gains, are tax-free and do not count towards the allowances available on other investments. These add up over the years, with interest and gains compounding, and there are ISA millionaires in existence. Putting the full amount of the allowance in at the start of the year allows the funds to grow immediately. Funds from ISAs can later be gifted free of any lifetime tax which allows for longer term planning to be considered.

Pension contributions

Tax relief on pension contributions is essentially free money from the government. If you can put in £80 (or even as little as £60) and the government treats this as £100, then you have received a 25% or 67% return already!

These funds compound over the time it is in the pension fund, and grow, and you can later take out 25% tax-free. If you are a business owner looking to retire, maximising your pension contributions will save you corporation tax (pension contributions are tax deductible), income tax if you forego or reduce dividends and potentially Inheritance Tax, as pension pots can be protected assets depending on how they are established.

The main downside of pension contributions is that you will have to wait to access the funds, especially as the pension age is increasing. 

Are you currently considering your plans for retirement?  It is crucial to make sure your plans are making the most of your tax allowances and tax reliefs today . Speak to one of our tax experts now. 

Make use of the allowances available across your family

Use the allowances you do have for each individual family member. The capital gains allowance is very small. However, you can still realise some gains every year to take advantage of this. If you have shares, then you will also be maximising the use of the dividend allowance. Spouses and civil partners can move assets between themselves so that these can be held and used tax-efficiently for income and capital gains tax purposes.

Investment schemes

For those who have more funds and are willing to take some risks with their money, Enterprise Investment Schemes and similar funds can minimise income tax, and defer CGT on investments where the proceeds are rolled-over into the EIS investments. These carry inheritance tax advantages if held for over two years as well.

There are a lot of advisors who are currently promoting schemes that are not guaranteed to work, that may not be as effective as they suggest and that may be challenged in future by HMRC, and that will incur an upfront cost. If it looks too good to be true, it probably is.

Sound counsel can be a financial lifesaver. Collaborating with your accountant, tax consultants, and financial advisors to examine your financial situation comprehensively can aid in strategizing for your future and your children’s as well.

Reach out for a discussion regarding your personal tax situation, get in touch today.