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Pre Year End Tax Planning – ISA/Tax Efficient Investments

Our previous article discussed how Gift Aid can help reduce your exposure to higher rate tax, but if you’re looking for ways to grow your savings and investments in a tax efficient manner, Individual Savings Accounts (ISAs) are a good option. If you haven’t used your ISA allowance of £20,000 for 2021/22, you only have until 5 April 2022 to do so before the allowance for the year is lost.

There are 2 main types of ISA – a cash ISA and a stocks and share ISA.

The cash ISA is a savings account where all interest received is tax free. This is especially useful for people with other interest above their personal savings allowance, or for additional rate taxpayers who do not receive a personal savings allowance.

Stocks and shares ISA’s have a double benefit. Not only is the dividend income received tax free, which gives a tax benefit if you have other dividend income over the £2,000 dividend allowance, but any growth within an ISA is also exempt from Capital Gains Tax, leaving your full annual exemption available to be set against any other gains.

There is also an Innovative Finance ISA which allows you to invest in peer to peer lending and a Lifetime ISA, which allows people under 50 to save towards a first home. The Lifetime ISA has a lower limit of £4,000 per year, however, this receives a 25% bonus on the amount invested each year.

There are further tax efficient investments which can be made by investing in EIS or SEIS qualifying shares. These come with good tax benefits to take account of the fact that these are generally higher risk investments.

On subscribing for the shares, you can claim Income Tax relief of up to 50%, depending on the shares subscribed for, which directly reduces Income Tax payable in the current or previous year. There are also 2 different Capital Gains Tax benefits, with the first exempting any gain on these shares as long as they are held for the required qualifying period and the second allowing you to defer or exempt other capital gains you have, depending on the type of shares subscribed for. Additionally, these investments are treated as being outside your estate for IHT purposes if they are held for the required qualifying period.

Finally, investment in Venture Capital Trusts (VCTs) gives Income Tax relief on the amount invested, any dividends paid are exempt from tax and growth in the value of the shares is not subject to Capital Gains Tax.

With any of these investments, in addition to discussing the tax benefits with us, we would always recommend taking appropriate financial advice from a qualified Financial Adviser, who we would be happy to introduce you to if required.

For more information on ISAs and tax efficient investments, or to discuss your own circumstances, get in touch with our Private Client Taxperts via [email protected] or call your local office.

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