If you receive a Christmas bonus and are considering your investment options, here are three possibilities you might want to consider that will help to cut your tax bill. If you’re not an experienced investor, or even if you are, it’s best to discuss any investment decisions with your financial advisor first.
Stocks and Shares ISA
For those who are newer to investing, a stocks and shares ISA represents a simple and relatively low-risk way to reduce your tax bill, while potentially earning a return on your investment.
PROS: Money you invest in an ISA is free of income and capital gains tax, so any returns you do make will also be tax exempt.
CONS: While you can remove your money at any time, it’s advisable to remain invested for at least five years. You can also only invest £20,000 per year, and while your investments might go up, they could also go down.
Venture Capital Trust
More risky, but potentially more lucrative, are Venture Capital Trusts. These are listed companies that invest in small businesses with growth potential. If you have a sizeable bonus you can afford to potentially lose, you’d like to diversify your investment portfolio and potentially see returns, they might be your preferred option.
PROS: Investors can claim tax benefit on up to £200,000 per year, including a generous 30% relief on income tax, provided they hold their shares for at least five years. The investment receives tax free growth, and any returns on investment are paid as tax-free dividends.
CONS: Because VCTs invest in fledgling businesses, they are substantially riskier than an ISA. Your investment may not gain value, and may lose value.
The real powerhouse of tax relief when it comes to high risk investments is the EIS fund, or direct investments into EIS eligible companies. EIS is a program established to incentivise investment into new businesses, and allows investors to claim tax reliefs on investments of up to £1,000,000 per year, or £2,000,000 if that money is invested into knowledge intensive companies.
PROS: Investors can claim 30% income tax relief on EIS investments after holding shares for three years, instead of the five years required by a VCT. On top of this, investments gain 100% inheritance tax relief, the option to defer capital gains tax, the option to claim income tax relief for a previous tax year, and the possibility of loss relief for any investments that fall below their original value. On the softer side, but an important pro for many, is the fact that your investment is benefiting new businesses and technologies that could make a significant impact.
CONS: Investing in startups is risky, and there’s a chance of your investment falling in value. EIS funds are only available to investors who pay tax in the UK.
For a data-driven fund with a minimum investment of £5,000, find out more about SyndicateRoom's Access EIS Fund
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