Your Guide to Tax Efficient Investing

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Optimising Tax Efficiency


Overview:

(S)EIS Schemes

Venture Capital Trusts

       Individual Savings Accounts (ISAs)

       Stocks and Shares ISAs

Innovative Finance ISAs

Cash ISA


We understand that tax-efficient investing is an important component of the investment strategy for many investors and is something that becomes increasingly desirable the higher your tax bracket is. But which tax-efficient investment schemes are really worth investigating? 


This guide will help you navigate through 5 tax-efficient investment schemes; explaining what they involve and the forms of tax relief they provide so that you can see which schemes best match your preferences and priorities, to help you make a fully informed decision. 

EIS and SEIS

The first two on our list are the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS); initiatives led by the UK government aimed at encouraging investment in UK-based, early-stage businesses. While similar, both schemes have important differences concerning their areas of focus and their tax reliefs.

Enterprise Investment Scheme (EIS)

EIS focuses on small-to-medium sized businesses who want to grow  their business, allowing individual investors to invest up to £1 million per tax year while presenting a range of tax benefits. Investors receive 30% income tax relief against the amount invested, as well as Capital Gains Tax (CGT) exemption on any EIS gains after 4 years, and CGT deferral relief. Furthermore, given the higher risk associated with investing in early stage businesses, EIS shares are also eligible for loss relief if their investment fails; limiting investment exposure to as much as 38.5% depending on your tax status.

2 Seed Enterprise Investment Scheme (SEIS)


SEIS focuses on very early-stage businesses and potentially a longer path to exit;  they therefore present a riskier investment opportunity than EIS. As such, SEIS tax reliefs are greater; providing investors with (i) 50% initial income tax relief on a maximum investment of £100,000 per year, CGT exemption on any SEIS gains after 5 years, and CGT reinvestment relief. As for SEIS loss relief, investors are able to limit their investment exposure up to as much as 27.5%, or 13.5% if reinvestment relief is claimed.    

For more information on EIS and SEIS, take a look at our comprehensive guide here, and take a look here to find out more about (S)EIS loss relief.




Venture Capital Trust’s (VCT’s)


Run by a professional manager, VCTs are investment companies listed on the London Stock Exchange that invest in early-stage businesses that often: (i) promote innovation or industrial change, (ii) are not generating enough cash flow to secure loans or other, traditional sources of finance, or (iii) need a substantial sum of capital (£100,000 to £2 million) to support their growth. 

Given their investment in higher-risk companies, similar to (S)EIS schemes, VCTs also offer several attractive tax benefits to attract higher and additional-rate tax payers. These include: (i) no CGT when investors sell their VCT shares, (ii) 30% income tax relief on investments of up to £200,000 per year, and (iii) tax free dividends. Please do note that these tax benefits are available provided that shares are held for at least 5 years.  

As for the types of VCTs you will come across, there are two: Generalist and AIM. Generalist VCTs typically invest in unlisted companies across a variety of sectors who may be unprofitable but show strong potential, or may have mature businesses. On the other hand, AIM VCTs invest in companies listed on AIM (LSE’s sub-market for small companies needing access to capital from public markets). Unlike Generalist VCTs, these investments are typically made via ordinary shares, and as such, may be more volatile than Generalist VCTs as its shares fluctuate in value. 



ISAs


Individual Savings Accounts (ISAs) encourage saving and investment by allowing individuals to benefit from a range of tax reliefs after placing their ISA allowance  across the various ISAs available, of which we have described the 3 main ones below: 

  1. Cash ISA: quite simply, Cash ISAs are savings account that allow you to earn income tax-free interest on your cash savings
  1. Stocks and Shares ISA: this allows you to place your ISA allowance into cash, government or corporate bonds, property, or stocks and shares. Alternatively, individuals also have the option of choosing a fund which provides a mix of different investment types. As for tax benefits, individuals have: (1) no personal liability to CGT on any growth, (2) no tax to pay on any dividend or tax distributions
  1. Innovative Finance ISA: these contain peer-to-peer loans and work by matching investors, who are willing to lend, with borrowers who could be individuals, businesses or property lenders. As you will be investing your money via a peer-to-peer lending platform, as opposed to a bank, you are likely to benefit from higher interest rates relative to a typical savings account; and unlike a non-ISA P2P, your interest earned is non-taxable

For the 2020/2021 tax year, the total ISA allowance is £20,000; while you cannot invest over £20,000 into your ISAs, dividing this sum across the various ISAs available can allow you to diversify and reduce exposure to risk. 


Conclusion

Overall, there are evidently a variety of approaches to tax-efficient investing to explore, with differing risk profiles and a range of generous tax reliefs available for investors. However, we encourage you to first evaluate the value of any underlying investment, as opposed to the tax reliefs they offer, before making a decision. 

If we’ve piqued your interest in tax-efficient investing through (S)EIS schemes, we invite you to explore our unique approach to (S)EIS investing and our (S)EIS fund benefits here