Investments

Investments

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Tax-efficient Investments

Tax-efficient investments are government-approved schemes that provide investors tax relief on investments into qualifying companies or investment plans. Create can advise on strategies to help manage, defer, and reduce taxes ...

Tax reliefs can include the likes of capital gains tax relief (CGT), loss relief and inheritance tax relief, etc. Tax efficient investments include, amongst others, ISAs (individual savings accounts) and the Enterprise Investment Scheme (EIS).

The Individual Savings Account (ISA), and its variations, including the Flexible ISA and Junior ISA, can be used by investors to save cash, and later re-invest the funds saved. Under this type scheme, investors pay no income tax on any returns earned from the ISA, and these investments are also free from capital gains tax.

  • Pay no capital gains tax on the sale of any shares from your investment
  • Pay no inheritance tax on profits made from your investment
  • Receive income tax relief of up to 30% on your investment

All UK citizens can start open an ISA and start saving as soon as they are sixteen years old. Junior ISAs allow adults to open ISAs for their children and put cash, stocks, and shares away until their child comes of age.

In 2016, the government rolled out a new version of tax efficient investments - the Flexible Individual Savings Account (Flexible ISA). Similar to cash ISAs, the Flexible ISA allows investors to withdraw money from their account and return it in the same tax year without reducing their tax free allowance.

As a tax efficient investment scheme, the EIS offers investors a number of tax related benefits. The primary benefit is that the EIS investor will receive income tax relief of up to 30% on their investment, which saves a significant amount of money that would have otherwise been spent on tax. This means that should an investor put up £1 million into an EIS they may claim tax relief for 30% of shares purchased. This would therefore result in a maximum tax reduction of £300,000.

Another key benefit of tax efficient investments is that there is no capital gains tax applied to the sale of any shares that the investor sells. Under certain conditions, investors can defer capital gains until a tax year when they retire, or a time when they are paying lower tax rates.

A further main benefit of this type of tax efficient investment is that investors won’t be required to pay any inheritance tax on profits made from the investment, as long as the investor remains as such for a two-year period.

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Socially responsible Investments

Investors can now back progressive companies that are helping shape a better world and conduct business in a better way, through impact investing and environmental, social and governance (ESG) factors.

Socially responsible investments (SRIs) are increasingly popular today, with younger generations placing a greater emphasis on a socially responsible investing, but also big investors such as pension funds are now seeking to back a more ethical stance.

This increased focus on sustainability within the UK's investment community will result in the national SRI market growing by 173% by 2027, reaching a new high of £48 billion.

Ethical investments traditionally exclude certain types of company, such as those that make weapons, partake in animal testing, or invest in the gambling industry. Investments that can be a force for good are not not just about the traditional notion of ethical investing such as avoiding sin stocks like tobacco and arms firms.

Investors can now back progressive companies that are helping shape a better world and conduct business in a better way, through impact investing and environmental, social and governance (ESG) factors. These types of company are more aware of the desire of governments, global organisations and individuals to improve the world we live in - ranging from the rise of electric cars, to having enough water and reducing plastic waste etc.

The argument for this type of investment is really quite simple - investors can use their cash to influence companies to be more socially and environmentally responsible, and simultaneously profit from future trends.

On the whole these types of socially responsible investments can be broken down into four main categories as follows:

Socially Responsible Investing Funds

There are several different classes of socially responsible investment funds. The first, and most traditional types of fund are simply known as socially responsible investing funds. These avoid investing in companies that are involved in controversial areas such as gambling, firearms, tobacco, alcohol, and even oil.

Environment, Social, and Governance Funds

The next class is Environment, Social, & Governance funds (ERG funds). Where socially responsible investment funds tend to focus on excluding industries that don’t use ethical practices or products, ERG funds concentrate on including ones that do.

Here there is a big difference. Because a fund excludes companies that produce products like tobacco, it doesn’t mean there aren’t some unethical practices in the companies that are included in the fund, it tows the line only in some cases. So ERG funds focus on companies that do function in entirely ethical ways.

Impact Funds

An extension of ERG funds are impact funds. These are ERG funds which place an equal emphasis on fund performance, whereas a normal ERG fund may not. This might mean the company is more aggressive in creating ethical changes with the products and services. An impact fund can be a good option if you want to be socially responsible, but still require a stock that will perform well.

Faith-based Funds

Lastly, there are faith-based funds. These investment funds only invest in stocks that follow particular religious faiths such as those with Christian, Catholic, or Islamic values. Any company that doesn’t fit this category will be strictly excluded from the fund.

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Investments for children

If you want to give your children financial help, say with university fees, buying their first car or home, there are a number of tax-efficient investment options

For tax purposes most parents choose to save in their children’s names rather than their own. By saving in your child’s name, the interest earned is generally tax-free (up to certain limits) as children get the same tax-free allowance as adults.

Whether you’re saving into a Junior ISA, premium bonds or an ordinary savings account, your child’s interest will remain tax-free up to the HMRC personal allowance limit.

There are a number of options for savings and investment products for children, including the following:

  • Junior ISAs (JISAs)
  • Adult ISAs
  • Child trust funds (CTFs)
  • Regular savings accounts
  • Cash saving notice accounts and fixed-rate bonds
  • Child SIPPs and Trusts

It is important to remember that any investment held in your children’s names legally becomes theirs at the age of eighteen to do with as they wish. This may not always be the best age to receive a large lump sum of money. An alternative could be to set up a discretionary trust. Setting up such trusts can incur hefty legal and administrative costs though, so these are better suited to those with significant property and/or funds to bequeath, rather than the regular saver.

Junior Individual Savings Accounts (JISAs) were introduced in 2011 as a replacement for Child Trust Funds, and any children who were not eligible for a trust fund can have a JISA.

JISAs have an annual savings limit of £4,260 (as at 2018/19), and these can be held completely in cash, or in stocks and shares, or indeed a mixture of the two. Only two JISAs may be held per child at any one time, which differs from adult ISAs which allow you to open one of each type per tax year.

Anybody can contribute to a JISA, although a parent (or legal guardian) must set the account up. It is important to remember that the funds cannot be withdrawn until the child reaches the age of eighteen. As an additional bonus, between the ages of 16-18 JISAs can be held concurrently with an adult ISA which gives the child a boost to their tax-free allowance for two years.

It is entirely feasible to save money for your children into your own adult ISA provided you are not already using all of your allowance yourself. The advantage is that you retain control of the money, even once the child reaches eighteen year of age, and you will also benefit from a larger allowance to use.

The downside of doing this is that although the money will benefit from the same tax breaks while it is in the ISA, there is no way to transfer it out to the child without it leaving the ISA and losing its tax-privileged status. The children will not have an automatic legal right to the money, and this can sometimes be an issue in the event of a death or a divorce for example.

Child trust funds were introduced in 2005 as a way of encouraging parents to save for their children straight from birth. Two incentives were offered by the UK government with £250 added to the fund by the government at the start and a further £250 paid in on the child’s seventh birthday.

CFTs have now been replaced by JISAs, with the government no longer issuing vouchers since January 2011. However, existing accounts remain open, with the savings limit having been raised from £1,200 to match that of JISAs.

In 2015 transfers from CFTs to JISAs were made possible, but it has been estimated that out of the six million CFTs around one million have been lost. This is because the address or contact details for the child are no longer available.

Some savings accounts for children offer interest similar to JISAs, but the crucial difference is that they allow instant access to the funds anytime, unlike a JISA which locks the money in until the child’s eighteenth birthday.

This type of savings account can be useful for teaching children good financial management. These types of savings accounts can be accessed by the child once they reach the age of seven, and can then pay in and out of the account.

Regular savings accounts can tend to offer lower savings limits than that of a JISA, and many providers reduce the rates when if the savers deposits exceed a particular amount.

For better rates of interest than those offered by regular savings accounts, cash savings notice accounts and fixed-rate bonds for children offer much better alternatives. They can also allow you to save more than a regular account or a JISA allows, which is very useful if you wish to save larger amounts.

With notice periods of between one and five years these types of accounts can serve as a middle ground, in between instant access accounts and JISAs and are suitable for those savers who may wish to access their funds earlier on.

SIPPs for children allow parents to pay into a pension for their child from the moment of birth. Just like adult pensions, children’s SIPPs qualify for 20% tax relief. This means that you only have to pay in £2,800 per year to receive back £3,600. Children’s SIPPS are very attractive to the type of person who likes to plan far ahead and wants to help provide their children with a very comfortable retirement pot.

When passing on wealth to your children and grandchildren, the subject of trusts comes up a lot. Trusts are traditionally seen as the preserve of the wealthy, but are actually used by very ordinary families too.

Trusts are legal arrangements which have one or more trustees who are legally responsible for holding the assets of the beneficiaries, which in this case would be your children.

Any assets, such as land, property, money, shares, etc. are placed in trust for the beneficiaries, and the trustees take responsibility for managing the trust and carrying out the wishes of the settlor. The settlor being a person who sets up a trust and settles or transfers the trust property on or to the trustees for the benefit of the beneficiaries.

There are basically two types of trust, (1) Bare trusts, which provide the children absolute right of access to their funds on their eighteenth birthday, and (2) Discretionary trusts which allows trustees to decide when and how much to pay out.

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Investments for Trusts

Investment trusts are public limited companies that aim to make returns from investing in other companies. Owning shares in such a trust is a way to invest in a variety of different companies.

The company’s shareholders elect a board of directors to monitor the company’s performance and look after the shareholder’s interests. In turn the board selects a professional portfolio manager to manage the company’s investments.

What investment trusts offer

You could take some of your pension as a lump sum, you can look to buy an annuity with your money, or you can use the new flexible-access drawdown arrangements available as a as a result of the Freedom of Pensions Act.

On the whole these types of socially responsible investments can be broken down into four main categories as follows:

Easy access

Today there are more ways than ever before to invest in an investment trust. As well as through traditional routes such as stockbrokers, savings schemes and ISAs, fund supermarkets and other platforms offer ranges of investment trusts.

Simplicity

Investment trusts sound complicated, but in reality are no difficult to understand than a standard unit trust. These investment trusts can provide investors access to a wide range of investments, but may be too complicated or costly to manage as a portfolio directly.

Income potential

Finding reliable sources of income is becoming more challenging for investors. An investment trust can sometimes retain as much as 15% of its revenue which means they can maintain consistent pay-outs by using reserves, even in challenging markets. This isn’t always the case though, as some investment trusts are unable to build up reserves, and even when there is surplus income it may not be enough to last a prolonged poorly performing market.

Gearing

Investment trusts are able to borrow in a number of ways, and at favourable rates of interest. By utilising gearing clients can benefit from additional exposure during a rising market. Naturally however, in a downturn they may be hit harder when stock values drop.

The use of gearing does however mean that the manager is taking on more risk. If an investment trust borrows and its investments perform well the overall performance will reflect this. However, if the underlying investments are poor performers, losses will be compounded. Investments trusts can be volatile, and hence investors must be capable of surviving market ups, as well as market downs.

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Business Investments

We can advise business owners on tax-efficient investment strategies including the structuring of income, pension contributions, and also other investment options such as property investments, venture capital trusts, and enterprise investment schemes for surplus funds.

Business owners should consider the various ways of reducing their personal tax liabilities while putting their business’s cash to work more tax-efficiently.

There are mainly three methods of extracting profits from a business, as follows:

  • Salary / wages
  • Dividends
  • Pension contributions

The remaining alternative is to leave all the profits in the business which are then taken from the subsequent sale of the business. What determines the best route is the net benefit to the business owner in terms of how they structure their income to minimise tax payments and maximise tax benefits. Our advisers can help business owners identify and improve on efficiencies achieved within areas such as business investment and profit extraction. This is usually achieved in a combination of ways.

For example, should you as the business owner take a minimum income and leave value to build up in the business? This may minimise the tax bill, but accumulating money in the business leaves the issue of what best to do with the money while it remains in the business. Alternatively do you take out the value regularly and pay a greater amount to the tax man. Which is better, salary or dividends, another alternative all together.

Another method of extracting value from a business is of course using a pension, which given the introduction of ‘pension freedom’ in 2015 is now even more attractive to business owners.

As with most things putting all your eggs in one basket is never the best approach, so it is usually better to employ a combination of the methods noted above. For example, leaving some profits in the business for cash flow, an optimal mix of salary and dividends, and pension contributions to further improve tax efficiency.

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