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Tax-Efficient Investing: A Practical Guide


January 29, 2020 ( Newswire) Investors often ask me what kinds of investment opportunities are the most tax-efficient, so it is high time I provided some insights into the various options available. Check out my practical guide so you can ensure you invest wisely.

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Investment Savings Accounts

Whether you are an angel investor, a venture capitalist, or a private equity or growth equity investor, there are many tax-efficient investing opportunities available to you. If you are new to investing, check out this recommended reading to find out the differences between the various types of investors. Some tax-efficient investments may require you to take a risk. But as you will already know, an investment with a certain amount of risk can not only potentially result in a loss. It can also provide a high rate of return. For each specific investment, only you can determine the exact amount of risk involved. However, several tax-efficient investing opportunities generally carry low risks. The first opportunity I would recommend is an investment savings account.

An ISA allows you to invest up to £20,000 per year without having to pay tax on your investment. There are seven types of ISAs available. The four main ones are:

  • Cash ISA: This savings account pays interest that is free of income tax.
  • Stocks and Shares ISA: With this ISA, you can put funds into a range of different investments, such as unit trusts, investment trusts, open-ended investment companies, and corporate bonds and government bonds.
  • Lifetime ISA: If you take out this type of ISA, the government will give you a bonus of 25% of the amount you pay in every tax year, up to a set limit.
  • Innovative Finance ISA: This ISA allows you to make peer-to-peer lending investments tax-free. You can fully invest in the Innovative Finance ISA, or you can spread your investment across different types of ISA. You can also transfer money from an existing Stocks and Shares ISA or Cash ISA into an Innovative Finance ISA.


My next recommendation for tax-efficient investment is pensions. The UK’s annual allowance allows you to make pension contributions of up to £40,000 each year. You can make this investment with tax relief at your prevailing income tax rate. The allowance tapers over £150,000, which means every £2 over £150,000 becomes reduced to £1. That effectively means your contributions are tax-free up to your annual allowance. The other good thing about pensions is you can use the amount you have paid in to invest in allowable assets. Those can provide income or growth without you needing to pay tax.

For business owners, I would recommend Self-Invested Personal Pensions and Small Self-Administered Schemes. Both of those pension schemes allow you to invest in a wide variety of assets that enable you to grow your investment. You can also achieve growth without risking paying capital gains when you sell your assets.

Enterprise Investment Scheme

Several venture capital schemes are excellent tax-efficient investing opportunities. The first is the Enterprise Investment Scheme, commonly known as EIS. The main goal of EIS is to provide a steady stream of capital to businesses that need the money the most. As an investor, you can back unlisted companies. Although early-stage companies can represent a higher risk for investors, the risk becomes offset by the availability of a host of tax reliefs. These include the headline income tax relief of 30% on your investment’s value, capital gains deferral on your invested gains and exemption on the growth you have achieved. EIS shares also qualify for loss relief on the net investment amount if the investment does not create a return.

Seed Enterprise Investment Scheme

The SEIS caters for early-stage businesses seeking investments. These businesses can provide attractive incentives to investors, although a SEIS does have a higher level of risk for investors than an EIS. Tax reliefs are similar but slightly better than an EIS. With a SEIS, there is 50% tax relief up front, and reinvestment relief enables investors to reclaim 50% relief on reinvested gains. Along with capital gains exemption on disposal and loss relief, the potential total exposure is as low as 13.5%. But I must stress that early-stage businesses are the riskiest, because of limited liquidity and a potentially long wait for an exit.

Venture Capital Trusts

A venture capitalist trust is a listed company that pools investments. It distributes those funds to build a diverse investment portfolio of qualifying companies. The structure enables investments into businesses that are at slightly later stages than start-ups. The reliefs via a venture capital trust can be less generous, but there is also a reduced risk for your investment. You can claim upfront income tax relief of 30%, and dividends paid are not subject to income tax without affecting your yearly dividend allowance.

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