Raging against the tax man? Here’s a better idea for tax-efficient investing

Tax-efficient investing isn’t the same as tax-obsessed investing. Based on our experience of helping clients with tax-efficient investment, we advocate a few first principles.

I’m sure you would agree that no rational person would have designed the UK’s tax system. But like any system that’s evolved through a mix of politics and expediency, it offers opportunities as well as frustration. It’s better to use these opportunities wisely than simply rage against the tax machine.

‘Wisely’ is the key word here. Tax-efficient investing isn’t the same as tax-obsessed investing, and there are two mantras to put on repeat:

• Poor performance or high charges can wipe out tax savings
• All tax-efficient investments are vulnerable to political change

Those health warnings apart, making the most of tax allowances is one of the keys to long-term wealth. Small tax savings on your investment returns year after year can deliver a significant compounding effect.

We’d love to give you a one-word, one-size-fits-all solution to tax-efficient investing, but the current tax system doesn’t allow for one. Instead, you need to navigate a wide range of vehicles and rules –

ISAs, pensions, shares, investment products, property and venture capital; making sure to make the best use of you and your family’s tax allowances.

The rules and regulations around all this are labyrinthine, of course. But there’s help available. A financial planner who is up to speed with the different tax wrappers, and their pros and cons for your own personal situation, is definitely your ally here.

Based on our own experience of helping clients with tax-efficient investment, we’d advocate a few first principles.

Tax-efficiency isn’t set in stone. Good examples are buy-to-let property and dividends from shares, which have seen significant tax changes recently. Always diversify and stay on the case.

Keep capital gains tax (CGT) on your radar. Savers tend to focus on income tax savings, but in 2018-19 the total CGT liability was £9.5 billion for 276,000 CGT taxpayers[1]. In addition to a choice of CGT-free vehicles, you have an annual CGT-free allowance for the 2020/21 tax year of £12,300. It’s a use-it-or-lose-it allowance, so timing is everything.

Don’t let convenience get the better of you. The fact that an investment is tax-efficient and has competitive charges may not justify putting money into the same holding year after year. You could end up over-exposed to one particular market or asset.

Seek real-life advice. Some investments work better for different tax brackets, so always ask questions such as: ‘Would this still be the best tax-efficient solution if my earnings went up (or down) £10k?’ Act accordingly if your income does change.

Effective tax-efficient investing is all about using a structured approach to make the most of what you have. We suggest you talk to a financial planner who knows the fine print of the different wrappers, and can look at them in the context of your personal circumstances and goals. Give us a call on 020 3823 8678 to find out how we can help you.

Tax rules are subject to change and taxation will vary depending on individual circumstances. This article does not constitute advice or a recommendation; please consult a financial adviser.

[1] Source: HM Revenue & Customs