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Financial planning: Tax efficient investing

Are you paying the right amount of tax? Ensure your get the best for you and your family

The start of a new year is the perfect time to start reviewing your financial arrangements to make sure that you paying only as much tax as you need to. In order to ensure your finances are in the best possible shape for you and your family, follow our guide to maximising your tax efficiency in 2018.

Capital Gains Tax allowance

Capital Gains Tax (CGT) is a good place to start as the allowance cannot be carried over into the new tax year on April 6.

Capital Gains Tax applies to profits made when disposing of an asset, but only when they exceed the general allowance for the tax year, which is currently £11,300. This allowance cannot be carried forward but assets can be transferred to spouses or civil partners without triggering CGT. This means their unused allowance can be used to the full.

If you are not currently crystallising any gains within your investment portfolio, it’s important to note that you may be building up a tax liability for a future date.

Dividend allowance

The government is set to reduce the dividend allowance from April so this is the last opportunity to take £5,000 tax-free.

From April, the allowance will be brought down to £2,000, meaning that income investments held outside of a tax-efficient wrapper are more exposed to a tax penalty. Anything above this amount will be charged 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate and 38.1 per cent for additional rate. Dividends that fall within the personal allowance do not count towards the dividend allowance.

As part of your annual portfolio review, you may want to consider switching out a proportion of your dividend-paying funds into interest-paying funds. This will allow you to leverage a separate tax allowance which was introduced in April 2016. The personal tax allowance stands at £1,000 for lower rate taxpayers, falling to £500 for higher and is eliminated entirely for additional rate. Check with your adviser to see if this would be a practical course of action for you.


A pension is one of the most tax-efficient ways of saving for the future and it is always worth trying to make the most of the annual allowance before the end of the tax year.

You can put away a maximum of either £40,000 a year, or 100 per cent of UK earnings if that is the lower figure. The unused allowance from the previous three tax years can also be carried over.

A tapered annual allowance applies to high earners. Those earning an adjusted income - including the value of any pension contributions - of more than £150,000 can see their annual allowance drop to a minimum of £10,000, depending on circumstances. It won’t be reduced if the threshold income for that year is £110,000 or less.

It is also worth noting that anyone who has already flexibly accessed part of a pension scheme, as they are entitled to under the pension freedoms that were introduced in 2015, will only have an annual allowance of £4,000.

Funds within personal pensions are outside of the estate for inheritance tax calculations and can be transferred to your spouse and/or children on death.

Reduce your inheritance tax bill

The allowance for Inheritance Tax (IHT) received a boost last April with the introduction of the Residence Nil Band Allowance (RNBA), but many households will still find their estate exceeds the tax-free allowance. Indeed, government figures show that inheritance tax receipts have risen by 18.7 per cent this tax year, representing £2.4bn which has been deducted from people’s estates.

Gifting is one of the most effective means of reducing the size of an estate and bringing down potential IHT bills. Anyone can gift up to £3,000 each tax year, free of IHT, and this can be carried over to the next year, for one year only. It is also possible to make as many gifts of up to £250 per person, as long as another exemption hasn’t already been used on them.

Gifts made out of income are also permitted as long as they do not have a material impact on your standard of living.

Trusts have long been a staple of generational wealth planning, in part due to the ability to control and protect family assets. Certain trusts allow you to still have access to income, capital or a mixture of both, while other trust arrangements provide you with an immediate discount regarding chargeable IHT on your estate. There are a number of different options available when it comes to setting up a trust so it is worth consulting a qualified financial planner.

Venture Capital Trusts

VCTs are essentially specialised investment trusts designed to encourage individuals to invest indirectly in a range of non-listed smaller companies that may otherwise struggle to raise capital.

Investors in new issues of VCT shares receive three main tax benefits: up to 30 per cent income tax relief, tax-free dividends, and capital gains exemption. The maximum investment limit is £200,000 and to keep the income tax relief shares must be held at least five years.

The shares don’t have to be newly issued in order to qualify for the dividend and capital gains exemptions, if they were bought on the secondary market from another investor for example, but will have to fall within ‘permitted maximum’ of £200,000.

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