Pay less inheritance tax for a bigger legacy
No one likes to pay more tax than they have to, but few of us have the knowledge or time to understand the intricacies of the UK tax system, and as a high-net-worth individual, it’s likely that your tax affairs are more complex than usual. In this article we explore some of the ways you can ensure your assets are structured in a tax-efficient manner.
If you are an adult residing in the UK, you can invest £20,000 each year into an ISA either as a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, Lifetime ISA*, or a combination of the four. Any income or capital gains arising from an ISA are free of both income and capital gains tax.
If you have children you can invest on their behalf in a Junior ISA (JISA) which has the same tax benefits as an adult ISA albeit with a lower annual subscription limit, currently £9,000 per annum. A JISA automatically converts to an adult ISA when your child reaches age 18 and they have full control over the investment from that point onwards. Children with a Child Trust Fund (CTF) aren't eligible for a JISA unless their CTF funds are first transferred to a JISA and the CTF closed.
Capital Gains Tax allowance
Capital Gains Tax (CGT) is tax on the gain when you sell or dispose of an asset that’s increased in value. Losses can be offset against gains but unused allowances cannot be carried forward. The new Annual Exemption Allowance (AEA) for Capital Gains Tax became effective from April 2023 more than halved to £6,000 and will reduce further to £3,000 from April 2024. Anyone considering selling or gifting an asset soon, should consider the timing carefully and if required, seek advice as soon as possible. Don’t forget, if you’re married or in a civil partnership, you have both of your allowances to use.
Consider putting more into a pension
Adding money to a pension is one of the most tax-efficient ways to save for retirement. If you’re a UK resident and under the age of 75, the general rule is you can contribute as much as you earn to pensions each tax year and receive tax relief up to the Annual Allowance. You can also carry forward unused annual allowances from the previous three tax years, subject to certain rules, providing further scope for making contributions. Most people can pay in up to £60,000 a year (the current Annual Allowance), but this can depend on how much you earn or if you’ve already taken money from a pension.
You can get up to 45% tax relief on anything you pay in. For example, for every £800 you pay into a pension such as a Self-Invested Personal Pension (SIPP), you’ll get 20% (£200) automatically added as basic-rate tax relief making a total contribution of £1,000. Higher-rate taxpayers can claim up to a further £200 (20%) in tax relief via their tax return, while 45% rate taxpayers can claim back up to £250 (25%) on top. According to a series of Freedom of Information (FOI) requests to HMRC, between 2016/17 and 2020/2021 76% of higher-rate taxpayers and 46% of additional rate taxpayers left behind £1.3 billion by failing to claim their additional 20% or 25% tax relief.
If you earn over £100,000, making pension contributions can be highly advantageous. Your personal allowance is reduced by £1 for every £2 of income above £100,000; this means your allowance is zero if your income is £125,140 or above. However, if you make a pension contribution, you are able to offset the reduction in your personal allowance.
The highest earners will still be limited by the Tapered Annual Allowance and adjusted income threshold, although the adjusted income threshold will be increased to £260,000 and the Tapered Annual Allowance to £10,000.
Divide your assets
Splitting your investments with your partner can also help you become more tax efficient. If there is an unequal division of income, married couples or civil partners may want to consider equalising investments to make the most of each partner’s ISA, income tax and capital gains tax allowances and pension contribution limits.
Consider investing in a Venture Capital Trust or Enterprise Investment Scheme
Another option to consider is purchasing shares in a Venture Capital Trust (VCT) which invests in qualifying businesses. These are higher risk investments, which typically include smaller, private companies. VCTs offer a number of tax reliefs, including up to 30% income tax relief of the initial cost of the shares which are then held for five years or more, up to the value of £200,000. Dividends are paid tax-free and can be sold without a Capital Gains Tax liability, should they rise in value. VCTs can also be used to defer gains arising on other assets.
Enterprise Investment Schemes (EIS) also offer benefits to investors wishing to diversify into smaller, growing businesses. Again, investors can claim income tax relief of up to 30%, up to the value of £1million. This increases to £2m if any investment above £1m is into ‘Knowledge Intensive Companies'. The investments can be used to defer capital gains arising on other assets. They too allow losses to be offset against other gains and should be free of Inheritance Tax after a holding period of two years. EIS have to be held for at least three years, otherwise income tax relief will be withdrawn.
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
Under Business Asset Disposal Relief you may be able to pay less CGT when you sell all or part of your business. This means that financial gains from the sale of a trading business up to the value of £1 million are taxed at 10%, instead of at standard CGT rates. This applies to individuals who are registered employees or sole traders and have held shares for more than two years. The £1 million allowance is available per individual per lifetime for eligible transactions.
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*Terms and conditions apply
Tax treatment is dependent on individual circumstances. This information is provided in good faith and is based upon our understanding of current tax law and HMRC practice, which may be subject to change in the future. It is important to obtain professional advice from an accountant or tax specialist before taking any action or making any decisions.
The information contained in this publication does not constitute a personal recommendation and the investments referred to may not be suitable for all investors. The secondary market for VCT shares and EIS qualifying shares is limited, meaning that investors may not be able to access their capital as quickly as they would like.
Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.