5 ways to make tax-efficient investments in the UK

Though utilising tax incentives in order to maximise potential returns is always a crucial consideration when investing, as inflation hit 2.4% in the 12 months leading up to June 2021 – with the Bank of England predicting it will rise further to 4% – whilst interest rates remain at rock-bottom levels, their importance is more apparent than ever. 

And there are five methods of tax-efficient investment for experienced investors which could be particularly attractive at present – the Individual Savings Account (ISA), non-standard pensions, the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCT). 

Individual Savings Account (ISA)

One of the most well-known tax incentives available to savers and investors in the UK, the ISA is now a household name – with circa 13 million Adult ISA accounts subscribed to in 2019/20 alone, when the market value of ISA holdings also hit a record £620 billion.

The ISA offers tax-free returns and an annual ISA allowance of £20,000 – the tax-efficient nature of which becomes even more apparent when taking advantage of features such as ISA transfers – available to subscribe across four Adult ISA products in 2021/22.

And amidst soaring inflation and a low interest rate environment, it’s the Innovative Finance ISA (IFSA) in particular that could be beneficial to experienced investors due to its ability to hold alternative investments that are uncorrelated with factors affecting more mainstream options. 

Enabling investment into peer-to-peer loans and debt-based securities, utilising the IFISA means experienced investors can make the most of the attractive, inflation-beating potential returns on offer from the likes of property bonds – which are often between 4% and 8% – alongside the ISA wrapper’s tax-saving benefits.

Self-Invested Personal Pension (SIPP) and Small Self-Administered Scheme (SSAS) 

When saving for later life, a pension is one of the most tax-efficient options available with a £40,000 annual allowance and benefits including up to 45% tax relief on contributions and the option to withdraw 25% of the pot tax-free as a lump sum or in separate withdrawals.

But for experienced investors looking to take a more hands-on approach to the management of their retirement fund, it’s pensions such as a SIPP and SSAS that can be particularly advantageous. 

Allowing investment into non-standard assets with a broader range of eligible investments than is available with traditional pension schemes – though permitted assets will differ on a provider-to-provider basis – both a SIPP and SSAS have the potential to aid experienced investors in building a strong pension portfolio. 

And in addition, the SSAS has even more benefits for owners of small and medium-sized businesses as it can be a tax-efficient tool for business growth – allowing the purchase of commercial property (which can be leased back to the sponsoring business), the purchase of shares in the sponsoring business, and boasting the ability to make loans back to the sponsoring business.

Enterprise Investment Scheme (EIS)

With over a record-breaking £5.1 billion invested into UK startups and scaleups in Q1 of 2021 – a 25% increase on the previous high of £3.9 billion in Q4 of 2020 – and Prime Minister Boris Johnson and Chancellor Rishi Sunak urging investors to back unlisted, early-stage companies, it’s clear that both the Government and experienced investors have confidence in these businesses as a tool for considerable growth.  

And when investing into EIS-eligible startups – which must be unquoted, have gross assets of less than £15 million, be within seven years of their first commercial sale and employ less than 250 people full-time – experienced investors have access to a host of tax benefits that aim to maximise potential returns and mitigate some of the risk associated with backing early-stage businesses.

These tax incentives include:

• income tax relief of up to 30%

• capital gains tax deferral

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

• loss relief on your ‘at risk’ capital should the opportunity not succeed

• no capital gains tax to pay when selling EIS shares if you have held the shares for at least three years, claimed income tax relief and the company you invested in still qualifies

Seed Enterprise Investment Scheme (SEIS)

Together, the SEIS and its older sibling the EIS have facilitated over £31 billion of investment into more than 45,000 startups since their introduction in 2012 and 1994 respectively.

The SEIS focuses on smaller, earlier-stage – and therefore generally higher risk – businesses than the EIS. To be SEIS-eligible, companies must be unquoted and less than two years old, employ less than 25 people full-time and have gross assets of less than £200,000. 

In turn, the SEIS offers investors even more generous tax incentives than the EIS. 

These include:

• income tax relief of up to 50%

• 50% capital gains reinvestment relief

• no capital gains tax on profits

• inheritance tax relief 

• loss relief on your ‘at risk’ capital

Venture Capital Trust (VCT)

Launched in 1995, the goal of VCTs is similar to that of the EIS and SEIS: to stimulate investment into early-stage, high-growth startups. 

The core difference is that, when investing into a VCT, investors are acquiring shares in the trust rather than individual companies, with the trust subsequently purchasing shares in a number of eligible companies. 

And when doing so, investors can receive:

• income tax relief of up to 30%

• tax-free dividends

• tax-free growth

To qualify for VCT investment, a business must be less than seven years old, have gross assets of less than £15 million and employ less than 250 people full-time.

Investing in a tax-efficient manner

Now more than ever, against an uncertain and ever-evolving economic backdrop, investing in a manner that has the ability to minimise risk and maximise returns - such as by significantly reducing your tax bills - is crucial. 

And with five core tax-efficient investment methods available to experienced investors in the UK which allow investment into a variety of assets – from property to startups – the potential to maximise returns whilst meeting your investment goals is strong.