Updated February 2023
We take a look at some of the main tax efficient investments and investment vehicles in the UK.
Although not every type of tax efficient investment is appropriate for everyone, at least one of the below will be relevant to virtually every reader.
ISAs
Investments within an ISA can generate income that is free of income tax and can generate capital gains without there being any charge to capital gains tax.
This year’s ISA allowance remains at £20,000 per tax year. Individuals can also make contributions into Junior ISAs of up to £9,000 per child in the current tax year.
Lifetime ISAs
Individuals can use a Lifetime ISA to buy their first home or save for later life. You must be 18 or over but under 40 to open a Lifetime ISA.
Individuals can put in up to £4,000 each year, until they’re 50. The first payment into your ISA must be made before you’re 40. The government will add a 25% bonus to your savings, up to a maximum of £1,000 per year.
Pension Contributions
Investments within a pension fund can generate income that is free of income tax and can generate capital gains without there being any charge to capital gains tax (albeit the income and gains stays in the pension fund until retirement).
The main benefit of a pension (other than the long-term tax-free investment growth and retirement funding) is the tax relief available on contributions made.
When paying into pensions, individuals receive income tax relief on any contributions they make at the highest rate of income tax they pay. For more information on how the tax relief works, see our blog post about the tax relief on pension contributions here.
Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) is a UK government scheme designed to help smaller higher-risk trading companies raise finance, by offering a range of tax reliefs to investors who purchase new shares in those companies.
Income tax relief
Tax relief of 30% can be claimed on investments (up to £1,000,000 per individual in one tax year) giving a maximum tax reduction in any one year of £300,000, provided the individual has a sufficient income tax liability to cover the income tax relief they get under EIS.
The shares must be held for at least three years by the investor from the date of issue of the shares, otherwise the income tax relief will be withdrawn.
Capital Gains Tax (CGT) deferral relief
If an individual makes a disposal of assets and this is subject to CGT, the payment of CGT can be deferred when there is an investment in EIS shares that is made one year before or three years after the gain arose.
CGT exemption
Any gain made on EIS shares is exempt from CGT provided the shares are held for at least three years and the income tax relief was claimed on them.
Other considerations
There are a number of other considerations regarding EIS investments, such as potential inheritance tax relief (which is very attractive), the carry-back of income tax relief, the various reliefs available when shares are sold for a loss and there are a number of restrictions on relief such as when the investor is ‘connected’ with the EIS company. Specialist advice should therefore be sought when dealing with EIS.
Seed Enterprise Investment Scheme (SEIS)
Like EIS, the Seed Enterprise Investment Scheme (EIS) is a UK government scheme designed to help smaller higher-risk trading companies raise finance, by offering a range of tax reliefs to investors who purchase new shares in those companies.
The difference with SEIS is that the companies are smaller and even more ‘start-up’ in nature than EIS companies.
As a result, the tax reliefs are slightly different. The main 2 differences are:
The income tax relief is at a rate of 50% (but the investment limit is lower, at £100,000 per individual per tax year), and
There is no CGT deferral relief with SEIS, instead, where an individual makes a disposal of assets and this is subject to CGT, provided an investment is made in SEIS shares in the same tax year as the disposal or the next year, 50% of the lower of the gain or the SEIS investment is exempt from CGT.
As with EIS, there are a number of other considerations regarding SEIS investments, therefore specialist advice should therefore be sought when dealing with SEIS.
Venture Capital Trusts
Venture Capital Trusts (VCTs) are investment companies that are listed on the London Stock Exchange and set up to invest in small UK businesses that meet certain criteria. To encourage support for these businesses the Government offers generous tax benefits for VCT investing. This also reflects the higher-risk nature of the companies they invest in. VCTs offer several tax benefits to encourage investment.
Income tax relief
Tax relief of 30% can be claimed on investments (up to £200,000 per individual in one tax year), provided the individual has a sufficient income tax liability to cover the income tax relief they get under the VCT.
The shares must be held for at least five years by the investor from the date of issue of the shares, otherwise the income tax relief will be withdrawn.
Tax free dividends
There is no Income Tax to pay on dividends from VCT shares, provided the £200,000 per tax year investment limit has been adhered to.
CGT exemption
Any gain made on VCT shares is exempt from CGT, There is no Income Tax to pay on dividends from VCT shares, provided the £200,000 per tax year investment limit has been adhered to.
As with EIS and SEIS, there are a number of other considerations regarding VCT investments, therefore specialist advice should therefore be sought when dealing with VCTs.
Contact Us
Please contact us to find out how the above applies in your circumstances and how you can reduce your tax liabilities and maximise your tax efficiency.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
