The financial services landscape is constantly evolving in the UK. It is sophisticated and fast-paced. One of many benefits that come from using a financial adviser is our ability to distil this complexity and craft tax-efficient financial plans for our clients.
Starting with the basics, we can use a deep understanding of the system to help clients minimise their tax burden and accelerate the accumulation of wealth.
Key to this is our capacity to make the most of tax-wrappers and government sanctioned tax reliefs. Each of these has nuanced benefits so it’s always important to find the right balance.
This simple guide has been put together by the independent financial advisers at Blackmount Private Wealth. It outlines some options you have for investing tax-efficiently.
POPULAR TAX WRAPPERS
Investments are predominantly taxed based on the type of account they are held within. The structure of these accounts means they are often referred to as “tax wrappers” because they wrap around your investment to provide protection from certain tax regimes. Examples of the most common tax wrapper are:
Individual Savings Account (ISA): This type of investment account is only available to residents of the UK. As the name suggests, they can only be owned by an individual, so you can’t have joint accounts with someone else. ISAs were introduced by the government to encourage saving and investing by sheltering the money held within the account from tax. Some of the key features are:
Tax-free savings.
Any income or capital gains generated within the ISA account are tax-free. That means you don’t have to pay income tax or capital gains tax on interest earned on cash savings, dividends from stocks and shares, or capital gains from investments held within the ISA.
Contribution limits.
Each tax year, individuals are allowed to “subscribe” up to a certain limit into their ISAs. This limit is set by the government and may vary from year to year.
Recently, the ISA subscription limit has been frozen at £20,000. There are various types of ISA (cash, stocks and shares, lifetime, innovative finance) and you can only pay into one of each type each tax year.
The maximum £20,000 applies across all ISAs. Lifetime ISAs also have more complicated limits and criteria for contributions.
A new “British ISA” has been proposed by the previous government, which may allow more to be paid into ISA accounts that only invest directly into UK focused assets. The government is due to consult on this before they are introduced.
Flexible investment options.
ISAs offer a range of investment options to suit different investor preferences and risk profiles.
Accessibility.
Unlike pension accounts, there are no restrictions on when you can access your funds so you can withdraw money from your ISA without penalty.
Some modern ISAs are also “flexible” which means you can put money back in during a tax year without impacting your subscription limit.
No reporting requirements.
There are no reporting requirements for ISAs because all income and gains generated within the account are tax-free. That simplifies the administrative burden for investors compared to taxable investment accounts (which may require you to submit self-assessments).
Transferability.
Individuals can transfer existing ISAs from one provider to another without losing their tax-free status.
This allows investors to shop around for better interest rates, lower fees, or different investment options while maintaining the attractive tax benefits.
For example, a cash ISA can be transferred to a new Stocks and Shares ISA allowing you to invest the savings built up rather than accruing interest.
Pensions: A pension is a long-term savings plan designed to provide individuals with income during retirement. Like an ISA, pensions can only be owned by an individual so there’s no way to share the tax benefits with anyone else. Regardless, they are a tax-efficient way to save for retirement. Some key features are:
Investment Bonds: As a type of investment product offered by insurance companies, Investment Bonds operate with their own unique tax rules. They’re designed to provide the potential for tax-efficient growth on a lump sum investment over a long period of time. Some key features are:
Tip: Where you have the financial capacity to do so, a good financial adviser will formulate a plan for you which structures your wealth across the various tax wrappers to maximise the benefits you receive.
BEYOND THE WRAPPERS: EXPLORING ADDITIONAL PERSONAL TAX STRATEGIES
In conjunction with tax wrappers, astute financial advisers will explore further strategies to minimise your tax liability. This might include things like:
Utilising the Capital Gains Tax (CGT) allowances.
Each tax year, individuals have an amount which is exempt from capital gains tax. That means you can realise gains from investments up to this value without paying tax.
Any gains above the annual exemption are taxed according to the CGT rates. The rate of tax paid varies depending on whether the chargeable gains exceed the higher rate threshold and/or the gain was made from residential property.
Additional reliefs such as Business Asset Disposal Relief (previously known as Entrepreneurs Relief) may be also available. Making the most of these allowances can help to structure your wealth as tax-efficiently as possible.
Spousal allowances.
Dividend reinvestment.
THE ART OF TAILORING TAX-EFFICIENT STRATEGIES
Understanding each client’s unique circumstances lies at the heart of tax-efficient wealth management and financial planning. Some factors we consider when crafting personal recommendations are:
Goals and objectives.
Before any planning starts, we need to find out what you are looking to achieve. Distilling this into specific, measurable, actionable, realistic, and time-bound (SMART) objectives and targeting your strategy towards this greatly increases your chance of success.
Risk tolerance.
Investment time horizon.
Other investments.
Trusts.
Tip: To get the most out of your wealth, we recommend instructing an independent financial adviser. Doing so will make sure your investment strategy is tax-efficient and aligned to your wider goals. That can provide immense peace of mind.
THE POWER OF COLLABORATION: PARTNERING WITH TAX PROFESSIONALS
UK tax legislation is complex and navigating the intricacies can be difficult – especially if you try to go it alone. Once you start to mitigate tax, your affairs can become complex quickly. Many professionals can spend a lot of time living and working outside the UK, which can impact residency status and entitlement to certain tax advantages. Combining personal financial planning with that of your business may bring in the need for an accountant. Placing money or assets into trust will require a solicitor.
If your tax affairs become particularly complex or your plans enter niche areas to offer you the best outcomes, Blackmount Private Wealth can introduce you to suitably qualified and experienced specialists. We have strong connection with accountants/tax advisers, solicitors, private bankers, etc., who can help you receive the most comprehensive wealth management programme.
Taking a collaborative approach can unlock additional opportunities for tax efficient financial planning, while giving you peace of mind the strategy is watertight.
THE BOTTOM LINE: EMPOWERING YOU THROUGH TAX EFFICIENCY
Mastering the art of tax-efficient financial planning allows independent financial advisers like Blackmount Private Wealth provide exceptional value to our clients.
Minimising the amount of tax you pay by making the most of government sanctioned reliefs and schemes, empowers you to:
Retain more of your hard-earned money.
Accelerate the accumulation of wealth.
Provide a comfortable retirement on the other side.
Achieve your long-term financial goals with confidence.
Your advisers stay abreast of evolving tax regulations and strategically use the wrappers, reliefs, and schemes available to you. That allows us to be a trusted partner on your journey to financial freedom.
IMPORTANT INFORMATION
The value of investments can go down as well as up and you may not get back the full amount invested. The past is not a guide to future performance. Past performance may not be repeated. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.
It is important to take professional advice before making any decision relating to your personal finances. Information in this blog is based on our current understanding of taxation and can be subject to change. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask us for details. We cannot assume legal liability for any errors or omissions this blog may contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.
The information contained within this blog is for information only purposes and does not constitute financial advice. The purpose of this blog is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.
The Financial Conduct Authority does not regulate some forms of tax advice, or trusts.