Four useful tax planning tips for investments

As the end of 2021/22 tax year edges closer, now is the perfect time to review your investments to ensure they as tax efficient as possible. Furthermore, from 6 April 2022, an increase of 1.25% in National Insurance (NI) and dividend tax rates will apply.

Here are our top planning points to consider putting into action as the end of the tax year approaches:

1. Utilise the dividend allowance and lower rates while you can

Where possible make use of the dividend nil-rate band that applies to the first £2,000 of dividends received by an individual. Where dividends exceed the dividend allowance, the rates for 2021/22 are 7.5% on dividends up to the basic rate band limit, 32.5% on dividends above the basic rate limit up to the higher rate band limit, and 38.1% on dividends above the higher rate limit.

If commercially viable, it may worth bringing forward a dividend payment to before 6 April 2022 to potentially save the additional 1.25% charge that comes in from 6 April 2022.

2. Savings in a tax efficient environment

ISA’s are exempt from income tax and capital gains tax (CGT) which allows your investments to produce an income and capital growth tax free, furthermore, there is no tax liability when you take the cash out of your ISA to spend it.

UK residents who are over the age of 18 can invest up to £20,000 per tax year into an ISA, and parents can also pay £9,000 per year into a Junior ISA (for children under the age of 18).

If you are between the ages of 18 and 40, you can invest in a Lifetime ISA (LISA) to save for your first home or for later life. Funds in a LISA can be withdrawn to buy your first home, but you must buy with a mortgage and the maximum price of the property is £450,000. Alternatively, funds can be withdrawn at age 60 or over.

3. Review your investments and opt for capital growth rather than for dividends

With the increased dividend rates due to come in and the fact that capital gains tax rates (maximum rate of tax on gains at 20%/28% on residential property and carried interest) are currently much more favourable to that of the income tax rates, you may wish to rearrange your investment portfolio. With advice from your financial adviser, it may be possible to rearrange such that it is invested in assets producing capital gains rather than income.

4. Consider making higher risk investments to reap the tax relief rewards

Enterprise Investment Scheme (EIS)

EIS is designed to help smaller companies succeed with the help of investors’ money backing them. Due to the higher risk of which companies will succeed, investors are compensated for the higher risk profile by being given a bonus of income tax relief at 30% on a maximum annual investment of up to £1m. The relief is given as a tax credit against tax liability. As long as income tax relief has been received and the company continues to be qualifying for three years, any gain on the EIS shares will be exempt from Capital Gains Tax (CGT).

Due to their unlisted and their risky nature, another advantage to investing in an EIS shares is that that they qualify for (currently) 100% relief from Inheritance Tax (IHT) relief under Business Relief if held for at least two years.

Invest Seed Capital in small business

Seed Enterprise Investment Scheme, (SEIS), means an investment of up to £100,000 each tax year could be made. SEIS investments are not regulated by the Financial Conduct Authority, so the risk profile is bigger, hence the 50% income tax relief on subscription. In addition to any gains on the SEIS shares themselves being exempted, under SEIS up to 50% of a chargeable gain arising can be treated as exempt from CGT where a qualifying SEIS investment is made.

Venture Capital Trusts

In addition to EIS and SEIS another option is Venture Capital Trusts (VCTs).

VCT’S are required to invest into smaller companies that are not fully listed putting them at the higher risk end of the spectrum compared to other investment choices. Income Tax relief is available at 30% on qualifying investments up to £200,000. Unlike the other options previously discussed, VCT dividends, so long as they qualified on investment, are tax free. The VCT can also buy and sell investments without incurring CGT within the trust, and there is no CGT payable on any gains made on sale of the VCT shares.

Please call Kate Thorburn on 01242 776 000 or email if you would like a no-obligation discussion about your personal tax affairs to ensure you are effectively using the allowances available to you before the 2022 deadlines.