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Tax-efficient investments

Tax mitigation is a key pillar of maximising your wealth and many people do not fully understand just how wide a range of options there are to make tax-efficient investments in the UK.

The government naturally wants to encourage investors to back UK businesses, and as a reward for taking on the elevated risks that are associated with early-stage and high-growth companies it has for decades offered a range of tax incentives for investors willing to take that chance.

The Enterprise Investment Scheme allows for investors to claim up to 30% income tax on qualifying EIS investments up to a maximum of £1m in a single tax year. If held for at least three years, when investors sell EIS shares, any growth in value from an investment is 100% tax-free. Loss relief can also reduce your effective tax bill powerfully and can be back-dated in certain circumstances. The sister scheme, the Seed EIS (SEIS), offers similarly attractive tax benefits and since it is intended for very small companies with high potential can be a way to participate in explosive growth if the right companies are chosen.

Venture Capital Trusts also offer investors the chance to benefit from tax-free dividends – no small consideration when the coming increases to dividends tax are taken into consideration – along with 30% income tax relief if the investment is held for five years. Investors can also benefit from tax-free capital gains up to a £200,000 investment limit as further enticement.

As you will be seeing by now, there are a number of tax mitigation benefits on offer for backing UK companies through these schemes and, as they are government backed, there are no risks of falling afoul of the Revenue as long as they are carried out in the correct way. Investors should be warned that there are unscrupulous providers who create spurious schemes, but if they only go with reputable providers with good track records there should be no concerns.

It should be noted, however, that tax-advantaged investments do represent higher risks as well as the potential for higher rewards, and they probably shouldn’t make up a very significant proportion of your portfolio. You will also need to enlist specialist help in claiming all the tax benefits available, particularly as claiming loss reliefs going back several years is a complex accounting job.

  • Minimising tax is just as important as maximising returns and there are a range of investment options which can help you do both
  • The Enterprise Investment Scheme, Seed EIS and Venture Capital Trusts could all be sound additions to your portfolio and generate savings across several tax charges
  • Tax-efficient investments do mean special risk-reward calculations have to be made, however, and can be complex from a reporting perspective

With the complexities understood and well dealt with, tax-efficient investing is a powerful way for you to make your money work harder – along with being a very nice way to help support UK companies and the domestic economy. It is an area where you will undoubtedly need specialist help, however, both with selecting the right investments to fit your risk-profile and the rest of your portfolio, and on the accounting side too.

Not all wealth managers deal with tax-efficient investments, so let us help you find the one that is right for you. Please do get in touch with any questions on tax-efficient investing or any other wealth management topic.

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