Investing can be a great way to grow your wealth as it can help you generate the kind of returns needed to reach your long-term goals.
Despite this, you might worry at times that growing your wealth through investing could leave you facing a hefty tax bill. You may face a range of costly taxes, such as Capital Gains Tax (CGT), Income Tax, or Dividend Tax.
However, investing through certain types of accounts or schemes could see you reduce or avoid these wealth-eroding taxes. So, here are three potential ways to reduce your tax liability while investing.
1. Invest through a Stocks and Shares ISA
ISAs are incredibly tax-efficient vehicles for saving and investing your hard-earned wealth. There are several different kinds of ISAs with their own respective benefits and rules, such as:
- Cash ISAs
- Stocks and Shares ISAs
- Lifetime ISAs (LISAs)
- Junior ISAs (JISAs)
You can pay up to £20,000 each year into either a Cash or Stocks and Shares ISA (as of the 2023/24 tax year) or split the allowance between the two. For example, you may opt to save £5,000 in a Cash ISA, while investing the remaining £15,000 in a Stocks and Shares ISA.
LISAs and JISAs have their own respective rules and allowances.
Read more: The essential guide to ISAs
With a Stocks and Shares ISA, your money is invested in shares, funds or other equity-based assets. These investments have the potential to increase in value over time.
They also have the added benefit of being incredibly tax-efficient.
- Returns from a Stocks and Shares ISA are not subject to CGT
- Any income derived from the investments is typically paid free of Income Tax
- There’s no Dividend Tax to pay on any dividends paid out on investments within the ISA.
Your ISA allowance can’t roll over from one tax year to another. So, it’s important you take advantage of your allowance and the respective benefits before 5 April each year.
2. Invest in a Venture Capital Trust
Venture Capital Trusts (VCTs) are quoted private equity funds traded on the London Stock Exchange. They normally consist of between 20 and 70 small start-up companies that are seeking further investment in order to grow.
They have the potential for significant growth over the lifetime of your investment. However, they are a higher-risk investment as the constituent companies also have a greater possibility of losses. That’s because the firms that make up the funds have a higher chance of failing in their infancy than more established businesses.
A few examples of successful firms to emerge from a VCT are:
- Everyman Cinemas
- Five Guys
Aside from the potential for growth, VCTs offer investors attractive tax benefits.
You can invest up to £200,000 each tax year (2023/24) while benefiting from:
- 30% Income Tax relief
- A CGT exemption
- A Dividend Tax exemption.
Although, you will need to retain your investment for at least five years to avoid having to repay any relief back to HMRC.
3. Invest in an Enterprise Investment Scheme qualifying company or fund
Launched in 1994, the Enterprise Investment Scheme (EIS) is a government supported programme aimed at encouraging investment in small start-up businesses in their early stage of development.
The government supports the programme to help nurture British companies that will create jobs and stimulate economic growth in the UK.
EIS qualifying companies must:
- Use funds to deliver growth, such as increasing revenue, expanding its customer base, or increasing the number of employees
- Have been trading for fewer than seven years, or 10 years if they are a knowledge-intensive company (KIC)
- Be permanently established in the UK
- Have fewer than 250 employees (500 for a KIC).
The relative size, age, and timeline for expansion of EIS-qualifying companies make them riskier investments than you might typically find in an average portfolio. Yet, they have the potential for significant growth over the timeline of an investment, which can make them very attractive.
Additionally, the government supports the EIS by offering tax relief to investors.
If you invest in an EIS, you could claim up to 30% Income Tax relief on your investment. You could opt to invest up to £1 million each tax year (as of 2023/24) in EIS-qualifying companies or funds, which would provide you with £300,000 in Income Tax relief.
In addition to this, you can invest up to £2 million each tax year (2023/24) in the EIS as long as £1 million is invested in KICs.
You’ll need to hold shares for at least three years, and the EIS-qualifying company must retain its status for the same length of time in order for you to keep any respective tax relief. Otherwise, you’ll need to pay the amount back to HMRC.
Any Income Tax relief is set against your Income Tax bill each year, so can only reduce your expected liability to nil.
When you decide to sell EIS shares, any growth in their value is 100% free of CGT. However, dividends gained might be taxable, especially if you’ve exceeded your annual Dividend Allowance of £1,000 (2023/24).
Get in touch
If you’re looking for ways to build on your hard-earned funds through smart investing, doing so in a tax-efficient way can ensure you retain as much of your wealth as possible.
The option you choose to accomplish this goal is likely to be determined by your personal circumstances and tolerance for risk. To discuss your choices in more detail, you should reach out to us by email at email@example.com or call 0117 9303510.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Enterprise Initiative Schemes (EIS) and Venture Capital Trusts (VCT) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.
Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.
Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.