Tax wrappers such as the Individual Savings Account (ISA), Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) can be key for experienced investors looking to maximise their potential returns. But with the Chancellor of the Exchequer’s Autumn Budget just around the corner, there is a possibility that changes to tax reliefs are to come.
Little is known about what to expect from the Budget, which will be delivered by Chancellor Rishi Sunak on 27th October 2021. It’s predicted that the most significant announcements took place earlier in October, such as the largest increase to personal taxes in two decades in a bid to fund social care in England and aid in the recovery of the NHS.
However, the Government has made no secret of their need to make back the billions spent during the Coronavirus pandemic in order to “build back better”. Therefore more tax rises, allowance freezes and even allowance cuts could be on the horizon.
In the Spring 2021 Budget, it was revealed that inheritance tax nil-rate bands would remain at existing levels until April 2026, and the capital gains tax-free allowance would also be frozen for the same period.
Though there was no mention of changes to the annual ISA allowance or EIS and SEIS tax reliefs in that Budget, there is always a chance that these incentives could be targeted in future Budgets.
The good news for ISA investors is that since its introduction in 1999, the ISA allowance has been on a continuous upward trend. Starting out at just £7,000, it has made its way up to its current amount of £20,000 – where it has stood since it rose from £15,240 in 2017/18.
And it may seem unlikely that, at a time when both Prime Minister Boris Johnson and Chancellor Rishi Sunak are avidly prompting investors to consider investment into UK startups, they would seek to diminish the attractive tax reliefs offered by EIS and SEIS-eligible opportunities.
But in these unprecedented circumstances, nothing should be ruled out and investors should be prepared for unwelcome surprises.
What is unlikely, however, is that any changes introduced would occur retrospectively. Therefore investors with funds already in an ISA for example – whether that be a Cash ISA, Stocks and Shares ISA or Innovative Finance ISA (IFISA) – would likely be unaffected.
As a result, now could be a better time than ever for experienced investors to make the most of any remaining 2021/22 allowance. And even if there aren’t any upcoming changes, utilising the allowance in full where possible each year is crucial for maximising potential returns.
Choosing an ISA amidst volatility and rock-bottom interest rates
Whilst now may be an important time to think about contributing your ISA allowance for the potential of tax-free returns, many experienced investors are disillusioned with some ISA products amidst all-time low interest rates and a volatile equities market.
Throughout Covid-19, the stock market has suffered intense fluctuations, which has seen billions wiped off share values. At the same time, interest rates have plummeted – with 0.6% the highest rate available at present on an instant-access Cash ISA.
And as inflation soars – rising to 3.2% in August 2021 from 2% the month prior – investors holding cash run the risk of the value of their funds being eroded over the long-term.
This is why it’s imperative to have a balanced, diversified ISA portfolio, and diversifying with alternative investments via an IFISA is a key consideration for experienced investors.
The IFISA is uncorrelated to both the Bank of England’s base rate – which dropped to a record-low of 0.1% in March 2020 and sent interest rates plunging – and the volatile equities market. The product boasts a number of eligible investment opportunities, from property bonds to environmental projects, that often target inflation-beating returns of between 4% and 8%.
With a booming housing market and a housebuilding sector that has proven its resilience over the last 18 months – delivering the highest number of new-build houses in over two decades – a property-backed IFISA could be a particularly attractive option.
Allowing a hands-off but impact-driven approach to property investment, through a property-backed IFISA experienced investors are not simply targeting higher returns than are available with many mainstream products, but also supporting small and medium-sized housebuilders in the delivery of much-needed housing at a time when the UK needs it most.
Preparing for a possible change to tax reliefs
As one of the most generous tax incentives available to savers and investors alike in the UK – and at a time when tax savings are more vital than ever for maximising potential returns – the desired outcome from Autumn’s Budget is that the ISA allowance goes untouched, or better yet, benefits from an increase.
But with all possibilities on the table as the Government looks for methods of boosting the country’s post-pandemic economic recovery, experienced investors should now consider their ISA options, and aim to make the most of their 2021/22 allowance before it’s gone.