Building your Wealth as the year draws to a close

With the autumn Budget still fresh in our minds, it’s always good to remember what we do have rather than dwelling on what we don’t (or rather won’t for much longer). There remain multiple tax-efficient ways of investing your money, facilitating a wide-scope of options involving assets that can also be both positively and negatively correlated. These can be used in a manner effectively tailored to meet your own particular circumstance and objectives. For example -

Individual Savings Accounts (ISAs)

ISAs are a tax-efficient way to save and invest your money. This means they are not subject to tax on any interest, capital gains tax (CGT) or income tax. 

You get a new ISA allowance every year, which is set by the UK Government. The ISA allowance for the current tax year (2024/25) is £20,000. ISA allowances cannot be carried over from one tax year to the next, so if you don't utilise your full allowance before 5th April, you will lose the rest - the tax year runs from 6th April to 5th April. 

There are various types of ISAs and these can also be transferred.

Investment Bonds (onshore/offshore)

Onshore investment bonds

Onshore UK investment bonds are non-income producing investments and so have a different tax treatment from other UK based investments. This can provide valuable tax planning opportunities. The funds underlying the bond are subject to UK life fund taxation meaning that you are treated as having paid income tax at the basic rate on the amount of your gain - no further basic rate tax is therefore payable and CGT is not applicable to a bond.

However, certain events (known as chargeable), that can occur during the lifetime of your bond may trigger a potential income tax liability at a higher or additional rate level depending on your total annual earnings and the number of complete years you have held the bond. 

For example:
•    Death giving rise to benefits
•    Transfers of legal ownership of part or all of the bond (though not gifts)
•    On the maturity of the bond (only applies to Capital Redemption bonds)
•    You cash in all your bond or individual segments/policies within it.

You can withdraw up to 5% each year (for a maximum of 20 years) of the amount you have paid into your bond without paying any immediate tax – this is known as a return of your capital. If you are a higher or additional rate taxpayer now but know that you will become a basic rate taxpayer later (perhaps when you retire for example) then you might consider deferring any withdrawals from the bond (in excess of the accumulated 5% allowances) until that time. If you do this, you may not need to pay further tax on any gains.

Offshore investment bonds

Offshore investment bonds are similar to onshore bonds, as chargeable events occur on the same basis as described above but there is one main difference - with an offshore bond no income tax is payable on the underlying life fund investments and this is known as a ‘gross roll-up.’ The lack of tax on an offshore bond means that potentially it could grow faster than one that is onshore, although this isn't guaranteed and the effect of other factors, such as charges and the investors marginal rate of income tax need to be taken into consideration in any comparisons.

Please note: you may therefore pay income tax on any gain at your highest marginal tax rate (basic, higher or additional) i.e. on withdrawals or chargeable events for example as with an offshore bond, basic rate tax has not already been applied at source. 

Venture Capital Trusts (VCTs)

VCTs are a type of collective investment vehicle where the money from several investors is pooled together and invested into small, potential high-growth companies. The VCT itself is traded publicly on the stock market and units can be purchased either when new capital is raised or from current investors (known as the secondary market). However, from an investor’s point of view, the main benefit comes from purchasing a VCT when it is raising new money from investors. VCT tax benefits for investors include:

Income tax relief – investors in VCTs can claim income tax relief at the rate of 30% up to £200,000 per tax year, provided they hold the VCT for at least five years. To claim the tax relief, the individual must be liable for, or have paid, as much tax as they invested in VCTs. This benefit doesn’t apply to shares purchased in the secondary market.

Dividends aren’t taxable, meaning no income tax is payable on dividends from underlying shares held within VCTs. Even though investments are in small companies, it is possible for VCTs to distribute dividends from capital, meaning any profits can be paid to investors as tax-free income.

Capital gains tax - no capital gains tax (CGT) is payable when investors sell their VCT shares.

Business Relief

When it was introduced by the UK government in 1976, the intention was to make it easier for family-owned businesses (such as farmers) to be passed from one generation to the next without triggering a large inheritance tax (IHT) liability that could potentially force the beneficiaries to sell the business. Although the recent Budget (October 2024) has made some changes to Business Relief moving forward, it is still viewed as an important IHT relief vehicle not only to family-owned businesses, but also to investors in Business Relief-qualifying companies.

How does Business Relief help with IHT?

Business Relief can claim 100% IHT relief (up to £1m and 50% relief over £1m) on the value of shares in a qualifying company, provided the deceased owned the business or shares in that business for at least two years before their death. Business Relief via the Alternative Investment Market (AIM) will only attract 50% IHT relief from the tax year 2025/26.

Summary

As with any investment, there is no guarantee that your target return will be achieved and you can get back less than you invested. Finding the right investment or blend of investments to meet your objectives can therefore be very time-consuming. The volume of options available is vast and not every one will be right or suitable for you in terms of risk or in achieving your objectives. Cash, property, bonds, shares……where do you start? A good place may be to speak to a financial adviser. Having an adviser on your side, assessing your objectives, reviewing them on a regular basis and helping you achieve them may just be the best investment you make.

Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.