A Guide to Tax-Efficient Investing

yellow words saying tax on top of coins - tax efficient investing

Whether you’re new to the world of investment or you’re a seasoned investor, you want to make the most out of your investment. To maximise your profit, you will need to consider the tax implications of your investment. This means considering your tax bracket and the impact of Capital Gains Tax.

We’re here to help you maximise your investments and protect your wealth from high inflation. Read on for our helpful guide on tax-efficient investing, including:

  • What tax-efficient investing is
  • Why tax-efficient investing is so important
  • The ins and outs of Capital Gains Tax on UK investments
  • The top five tax-efficient investments
  • Whether art is a tax-efficient investment

 

What is Tax Efficient Investing?

Tax-efficient investment is all about choosing the right investment into the right account. It’s all about maximising your investment returns while minimising the amount of tax you need to pay on your return.

Considering the tax implications of your investments can ultimately help you plan for your future, whether it be saving for your retirement, passing your wealth on to loved ones, or preparing for university costs or school fees.

For example, it may involve utilising tax-free accounts (ISAs), which offer tax benefits such as tax-free withdrawals or tax-free growth. It could also involve opting for investments that offer tax-free interest or dividends – or even tax relief on your investment. You could also seek the help of a financial advisor to ensure you’re adhering to the regulations while minimising your tax.

But why is it so important to be tax-efficient while investing? Let’s find out.

 

Why is Tax Efficient Investing So Important?

Tax efficient investing can ultimately help you make the most of your returns by minimising the impact of taxes on your gains. When you consider tax, you can legally reduce your tax liabilities – which means you can keep more of your profits.

It all boils down to responsible financial management – ensuring you optimise the resources available and adhere to regulatory requirements.

So, to summarise, being tax efficient with your investments means you can:

  • Preserve your wealth
  • Achieve your financial goals
  • Build a more secure financial future

 

Understanding Capital Gains Tax on UK Investments

When you sell your investment for profit, you may need to pay Capital Gains Tax (CGT). CGT is a tax that occurs when you sell something you own, whether it be art or stocks and bonds. You pay the tax on the amount of money you gain from selling the asset. This is typically calculated by the value of the sale price in comparison to the purchase price.

There are some exceptions to CGT, such as:

  • Profit from assets under £3,000
  • UK Government bonds
  • Most corporate bonds
  • Investments in an ISA
  • Profit from selling your primary property (home) in most cases

 

If you make a loss when you sell an asset, you could deduct this from other capital gains, ultimately lowering your tax bill. A loss when selling an asset is known as a capital loss.

The CGT allowance is currently £3,000. This means you will be taxed on anything over this annual allowance. The amount you pay can depend on several factors, such as:

  • Your tax band (e.g basic rate or higher rate)
  • The nature of the asset

 

It’s important to note that you are unable to carry forward your allowance. Instead, make the most of this annual allowance every year, and consider the best time to sell your long-term investments.

 

Top 5 Tax-Efficient Investments to Consider

Now you have an understanding of the importance of tax-efficient investing, let’s explore some of the best options available to help you maximise your gains!

 

1 – Individual Savings Accounts (ISAs)

At the top of our list, we have ISAs. These are a stable of the investment world – you can invest a maximum of £20,000 without having to pay any tax on income/ returns.

There are several options to choose from, including:

  • Stocks and Shares ISAs
  • Cash ISAs
  • Lifetime ISAs
  • And many more

 

The bottom line is that all of the interest, capital gains and dividend income from ISAs is completely tax-free. However, be wary that you can’t add more than £20,000 to your ISAs – however, you can split this allowance between different types of ISAs. This is a wise move to balance your portfolio and ultimately minimise the risk.

 

2 – Premium Bonds

Next, we have premium bonds. These are issued by National Savings and Investment (NS&I). This option is a little different to other investments, as you don’t earn interest – instead, you will be entered into a monthly draw for tax-free prizes. In this draw, you can win anything from £25 to £1 million – all completely tax-free. You can hold a maximum of £50,000 in Premium Bonds.

Your return on these bonds ultimately comes down to luck. It’s important to note that the average return on premium bonds is generally lower than other investment avenues – however, the tax-free nature of this route can make it a great choice.

 

3 – Pension Schemes

Pension schemes can offer tax relief at the highest rate of income tax. Pension schemes such as a Self-Invested Personal Pension (SIPP), or a workplace pension, are great choices – your pension pot will grow free of Capital Gains Tax & Income Tax. This ultimately gives you a tax advantage in the long run, allowing you to grow your wealth without worrying about it being worn away by tax.

 

4 – EIS Startups

EIS – or The Enterprise Investment Scheme – is a UK-based incentive that encourages investors to invest in small businesses. With EIS, you can make the most of benefits such as 0% CGT when you exit the investment, and 100% relief if the company you invested in goes bankrupt/ bust.

You can invest a total of £1 million per tax year, and get 30% Income Tax relief for the amount you invest in.

 

5 – SEIS

SEIS (Seed Enterprise Investment Scheme) was launched back in 2012 as a way to encourage investors to invest in start-up businesses. It’s similar to EIS investment – however, it has slightly stricter eligibility criteria.

It can be a great tax-efficient choice as you can claim up to 50% relief on investments. This means that if you invest £10,000, you could lower your tax bill by a staggering £5,000. If the investment doesn’t go as planned, you can also claim loss relief against your income tax – making it a low-risk choice.

 

Is Art a Tax Efficient Investment?

If you’re looking to invest in art, you may be wondering whether it’s tax efficient or not. If you are in the basic rate of income tax, then you will need to pay 10% CGT on the proceeds of an art sale. However, if you’re in the higher rate, then you will need to pay 20% on the profits.

Bear in mind that these rates could change – so always check the current regulations and seek the advice of a professional beforehand. We recommend liaising with an art advisor if you’re considering investing in art – they can guide you through the process and ensure you make the most of your investment.

Begin your investment journey today with Grove Gallery. You can generate up to 12% profit per year, and invest with as little as £3,000. Our experts are here to guide you and help you get started on your art investment journey!

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yellow words saying tax on top of coins - tax efficient investing

A Guide to Tax-Efficient Investing

Whether you’re new to the world of investment or you’re a seasoned investor, you want to make the most out of your investment. To maximise

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last call before our waiting list starts

From September 2023 we will be locking down our fine art investment ownership and you will have to join a waiting list. To add Fine Art Investments to your portfolio fill your details below and one of our advisors will be in-touch.

By submitting this form you agree to our terms & conditions

last call before our waiting list starts

From September 2023 we will be locking down our fine art investment ownership and you will have to join a waiting list. To add Fine Art Investments to your portfolio fill your details below and one of our advisors will be in-touch.

By submitting this form you agree to our terms & conditions

last call before our waiting list starts

From September 2023 we will be locking down our fine art investment ownership and you will have to join a waiting list. To add Fine Art Investments to your portfolio fill your details below and one of our advisors will be in-touch.

By submitting this form you agree to our terms & conditions

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