Ensuring Your Investments are Tax-Efficient for the New Year

As inflation soared to a decade high 5.1% in November 2021 – exceeding most economist’s forecasts, including those of the Bank of England, who projected it wouldn’t peak at 5% until 2022 – it’s a crucial time this new year for experienced investors to re-assess their investment portfolios.

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Whilst the Bank’s Monetary Policy Committee voted to raise the base rate from 0.1% to 0.25% on 16th December 2021, investors holding cash still face the likelihood of the value of their funds being eroded over the long-term due to  skyrocketing inflation paired with rock-bottom low interest rates, and it’s clear steps must be taken to maximise potential returns and reduce the risk inflation poses on an investor’s capital. 

To do this, investing in a tax-efficient manner is crucial – a fact that was reiterated as Chancellor Rishi Sunak proclaimed on Twitter, on the day of his Autumn 2021 Budget announcement, that “now is not the time to remove tax breaks on investment”. 

With multiple investment vehicles with various tax advantages available to investors in the UK at present – from the Individual Savings Account (ISA), through to the Enterprise Investment Scheme (EIS) – serving an attractive range of eligible assets, there are ample opportunities for experienced investors to build a diversified, tax-efficient portfolio. 

 

The popular Individual Savings Account (ISA) offers tax-free returns

For over 20 years, the ISA has been one of the most generous tax wrappers available to investors, with four core products – the Cash ISA, Stocks and Shares ISA, Innovative Finance ISA (IFISA) and Lifetime ISA – offering returns free from both income and capital gains tax. 

All UK citizens over the age of 16 receive an annual ISA allowance, which is currently £20,000, that they can subscribe across products. As a result, experienced investors can build a diversified ISA portfolio consisting of cash, equities, and alternative investments such as property bonds and SME loans. 

The core advantages of utilising an ISA are clear: tax-free returns and the ability to spread capital across a variety of asset classes. Therefore it’s no surprise the ISA market value hit a record £620 billion in 2019/20. 

Whilst the savings-based Cash ISA may not be an appealing option for experienced investors looking for an ISA with growth potential – as the best interest rate currently available on an instant-access Cash ISA is just 0.67%, far below the current rate of inflation – the Stocks and Shares ISA and IFISA could be more attractive.

And with a property-backed IFISA in particular, experienced investors not only target tax-free potential returns typically in excess of 7%, but they are also gaining exposure to the ever-popular property market, a market that has shown significant resilience throughout the Coronavirus pandemic with a continued positive outlook for 2022.

 

Access generous tax reliefs when supporting startups with the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)

A record £13.5 billion was invested into UK startups in the first half of 2021, with Prime Minister Boris Johnson and Chancellor Rishi Sunak encouraging investors to back startups in an “Investment Big Bang”.

And for experienced investors interested in supporting the next wave of business, they could benefit from a host of tax reliefs when backing EIS and SEIS-eligible opportunities. 

Created to aid investors into unlisted, early-stage businesses in offsetting the higher risks associated with investments of this kind, both the EIS and SEIS offer loss relief on “at-risk” capital should the opportunity be unsuccessful, as well as up to 30% income tax relief with the former and up to 50% with the latter.

As well as these, the EIS boasts:

  • capital gains tax deferral

  • no inheritance tax after the investment has been held for two or more years, and

  • no capital gains tax payable when selling shares if they have been held for at least three years, you have claimed income tax relief and the company still qualifies

And with the SEIS, you could receive: 

  • 50% capitals gains reinvestment relief 

  • no capital gains tax on profits, and 

  • inheritance tax relief

With more capital than ever flowing into the UK’s tech startup sector in particular – £29.4 billion in the last year, up 2.3x from last year’s £11.5 billion figure – and recent data indicating the UK’s startup scene in general is in its strongest position in decades, EIS and SEIS-eligible opportunities are a crucial consideration for experienced investors in 2022. 

 

Utilise your pension to its maximum with a Self-Invested Personal Pension (SIPP) or Small Self Administered Scheme (SSAS)

Thanks to an annual allowance of £40,000 (as of 2021/22) and tax benefits such as up to 40% tax relief on contributions and the option to withdraw 25% of funds tax-free as a lump sum or across separate withdrawals, pensions remain one of the most tax-efficient options for saving for later life. 

And for experienced investors in particular, a SIPP and SSAS allow for greater choice and control over where funds are invested – providing opportunities to invest into non-standard assets such as property bonds in a highly tax-efficient manner and in a way that could prove particularly beneficial in retirement. 

There are notable differences between a SIPP and SSAS, such as the structure of the schemes and the specific eligible assets, but both offer investors who wish to take a more hands-on approach in the management of their retirement funds the ability to do so. 

In addition, a SSAS – which is an occupational pension scheme set-up and managed by a business owner for themselves and their employees – can be a tool for business growth, boasting opportunities to purchase shares in the sponsoring business and buy and then loan-back commercial property to the sponsoring business. 

 

Investing tax-efficiently in 2022

It has always been important for investors to make use of available tax incentives in order to minimise risk to a degree and maximise their potential returns. But in the current economic climate, the importance of this has been exacerbated. 

In this case, it’s positive news that experienced investors have numerous opportunities to capitalise on the sectors that have proven prosperous over the past two years – from the booming housing market, to tech startups – whilst utilising tax-efficient vehicles such an ISA, the EIS, the SEIS, SIPP or SSAS to often significantly reduce tax bills when doing so.