"The tax tail shouldn’t wag the investment dog" is a well-known phrase in the financial planning world and this is largely true, but the availability of tax privileges is something that clients should take advantage of where possible.
Any investment plan should be designed around a client’s needs taking into account short, medium and long-terms objectives and the availability of capital sums or regular amounts to contribute to their financial plan.
The first port of call for shorter/medium term savings is most likely to bring ISAs into the mix and, with the imminent introduction of an overall contribution limit of £20,000 per individual, a substantial tax-free pot of money can be built up that allows a high degree of access at the same time.
Of course, if the client meets the criteria, taking advantage of the new breed of ISAs - such as the Lifetime ISA - could add to the overall tax efficiency of this part of the portfolio. And whilst ISAs are in mind, parents can also consider some long-term tax-privileged savings for their children by investing in the junior version, too.
Pensions remain one of the most tax-efficient savings vehicles available and, although recent budgets have brought speculation around the limitation of tax relief, pensions are, for most clients, a critical cornerstone of their financial plan.
The pension freedoms legislation significantly enhanced the attraction of pensions as a long term and tax-efficient generational planning tool, factors which cannot be ignored in creating a balanced financial plan. And don’t forget that pension savings for children/grandchildren are also tax efficient – and with a longer term investment horizon, what better way to provide an enduring legacy for future generations?
Portfolios of shares or collectives can also be prove useful, with the availability of the Capital Gains Tax Annual Exemption allowing withdrawals to be made tax-free so long as the amount of gain realised is less than £11,100 in the current tax year.
Clients with large sums to invest may also consider the advantages offered by investment bonds which will allow them access to five per cent of the original capital sum invested on a tax deferred basis. It is important to remember that these do not avoid income tax completely, but can be used as part of an overall tax-efficient income strategy when combined with other vehicles.
Enterprise Investment Schemes, Seed Enterprise Investment Schemes and Venture Capital Trusts all bring key tax incentives to the table and many clients would also do well to give due consideration to the merits of these, albeit with an appreciation for the inevitability of higher risk that comes with such investments.
Many of our clients will also have to consider Inheritance Tax in their planning and some of the areas mentioned above will also offer benefits in this area, as well as the use of trusts and lump sum IHT planning arrangements.
As with any financial plan, it is key to focus on the client’s circumstances and build an efficient plan - from an investment and tax perspective - from that starting point.
There are a number of tax-advantaged routes to saving an investment – the trick is to achieve the correct balance between all of the relevant factors to achieve the optimum outcome for each client.
- George Houston, Senior Technical and Development Manager, March 2017