Tax-efficient investments are made through government approved schemes and offer investors vairous forms of tax relief on their investment. These tax reliefs range from capital gains relief through to loss relief and inheritance tax relief. There are a large number of tax efficient investment opportunities including ISAs, SEIS investments, EIS investments, SIPPS and Venture Capital Trusts.
Individual savings accounts (ISAs)
ISAs can be used to save cash, or to invest in stocks and shares.
For the 2016/17 year tax year, you may pay an annual allowance of £15,240 into a cash ISA, a stocks and shares ISA, or one of each in any tax year. You pay no income tax on the dividends or interest that you receive from an ISA, and any profits you receive from investments are free of capital gains tax. Learn more about ISAs here.
You must be over 16 to qualify for a cash ISA, and over 18 for a stocks and shares ISA; for under-18 ISAs, see Junior ISAs below.
Flexible ISAs, which were introduced in the UK in 2016 as a new entry in the tax-efficient investing field, function a lot like cash ISAs but with an added flaxibility. You can take money out of a Flexible ISA at any point and return it in the same tax year without it reducing your current year's tax-free allowance.
Help to Buy ISA
The Help to Buy ISA, which is designed to help first-time buyers save money towards buying their first home, will be introduced on 1 December 2015.
After an initial deposit of £1,000, you’ll receive a £50 bonus for every £200 saved, to a maximum bonus of £3,000. As with a standard ISA, any interest you earn will be tax free.
Help to Buy ISAs will be limited to one per person and you will not be able to contribute to a Cash ISA in the same tax year.
Innovative Finance ISA (IFISA)
Available from 6 April 2016, the new Innovative Finance ISA will entitle lenders to tax-free interest in loans arranged through peer-to-peer (P2P) platforms.
A Junior ISA lets you build up a child’s savings and earn tax-free interest. Friends and family may add money to the account on behalf of the child up to the savings limit. The savings limit for Junior ISAs is £4,080 for the 2015/16 tax year, though this limit may change in future; check the UK Government website for updates.
There are two types of Junior ISA: cash, and stocks and shares. A child may have one or both types of Junior ISA, and there is no income tax nor capital gains tax payable on interest or investment earnings.
Junior ISAs are available to any children under the age of 18 who are living in the UK, so long as they don’t qualify for a Child Trust Fund. The child can take control of the account after they turn 16, but cannot withdraw money until the age of 18.
Enterprise Investment Scheme (EIS) investments
The EIS was launched in 1994 to encourage investments in small, high-risk companies in the UK.
Relief is 30% of the cost of the shares and is set against the investor’s income tax liability for the tax year in which the investment was made. Tax relief may be claimed up to a maximum of £1 million invested in such shares, setting the maximum possible tax reduction at £300,000.
A carry-back facility allows for part or all of the cost of the shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year, thereby securing relief for the earlier year.
Seed Enterprise Investment Scheme (SEIS) investments
The SEIS is a tax efficient investment designed to complement the EIS by helping small, early-stage companies raise equity finance. It does this by offering tax reliefs to individual investors who purchase new shares in those companies.
Income tax relief is available on qualifying shares, to people who have UK tax liability against which to set the relief. Shares must be held for three years from date of issue in order for relief to be retained in full.
Tax relief is available at 50% of the cost of the shares, on a maximum investment of £100,000 per annum.
Like with the EIS, the SEIS has a carry-back facility that allows for part or all of the cost of the shares acquired in one tax year to be treated as though the shares had been acquired in the preceding tax year, thereby securing relief for the earlier year.
SEIS is applicable to shares issued on or after 6 April 2012.
Venture Capital Trusts (VCTs)
Introduced in 1995, the VCT scheme is a collective investment scheme that encourages investment in small companies with the aim of returning a profit to investors.
VCTs offer investors exemption from income tax on dividends on ordinary shares, and income tax relief of 30% on the value of new ordinary shares subscribed (capped at £200,000 per tax year) providing that shares are kept for at least five years. You may also be able to get disposal relief through VCTs.
To view potential tax efficient investments: