Tax Efficient Investing in the UK

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Trying to invest tax efficiently can be frustrating when the playing field keeps changing. With taper relief, it used to be really efficient to have a large AIM portfolio – now it isn’t. You used to get capital gains tax rollover through VCTs – now you don’t. However, there are still plenty of ways to invest in a tax-efficient way.

The most obvious for any stock market investor is of course the ISA. You can put £7,200 this year, unless you’re over 50, in which case you can invest £10,200 – next year, that goes up to £10,200 for everyone. Over time, you can build a fairly significant ISA portfolio.

An ISA will give you several advantages. No CGT. No income tax on dividends (though you still pay 20% through the tax credit which can’t be reclaimed). And no need to fill in anything about it on your tax form. While the income tax break isn’t significant unless you’re paying higher rate tax, the CGT tax break can be very useful. You can take profits on your positions without having to worry about whether you’re going to incur CGT. A £100,000 portfolio might only generate £4,000 in dividends a year – but you’re much more likely to incur over the £9,200 capital gains tax threshold of profits.

Now you can also gain efficiencies by investing in a SIPP (or indeed any other pension scheme). The tax benefit here is up front – you can claim your contributions as an allowance against your income tax liability. I won’t go into it in detail now, but subject to the lifetime and annual limits this can be an efficient way to invest.

VCTs are another useful break. These are investment trusts which invest in smaller companies and comply with various stringent regulations; you can invest up to £200,000 a year (rather a lot more than with an ISA!) and you can get 30% tax relief on that. To get the up-front tax relief you have to subscribe to a new VCT issue. But there are also advantages to buying second-hand shares, since all VCT dividends and capital gains are tax free. So if you have a large enough portfolio to be paying CGT most years and can’t shelter all of it in an ISA, if you ask me, VCTs make good sense as an investment.

What’s wrong with VCTs? Plenty. They invest in smaller companies so can be high risk. And they are often very illiquid, so really not suitable if you’re going to need the money. I don’t like to call it ‘investment’, but for more active investors wanting to make some of their capital gains tax free, spread betting has its attractions. The Inland Revenue says it’s not investing, it’s gambling – so there is no tax payable on your winnings. If, of course, you have any.

The tax man will inevitably take some of what you earn – and rightly so! But its worth doing your research and using your tax allowances and tax-free savings schemes to the full. That way, you can minimise what you’re giving to the government – and do so, I hasten to add, completely legitimately!

Comments

One Response to “Tax Efficient Investing in the UK”
  1. petersteel says:

    that was really nice to read that.. that was really great post.. it seem great information.. that’s great…

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