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Tax Efficient Investing - March 2015



    Less experienced and even seasoned investors are often left baffled by tax-efficient investing or are simply just not aware of the tax benefits available.

    A recent study by and Prudential found that total tax waste this year could be as much as £4.9bn through unused allowances in Isas, pensions, capital gains tax (CGT) and inheritance tax. The 2015 Tax Action report attributed these unnecessary tax payments to a lack of awareness, apathy and insufficient knowledge among UK taxpayers.

    Cash Isas are probably the simplest tax-efficient structure available to investors, yet the report suggests that £1.2bn of Isa allowances will be left unused this year. It predicts that £104m will also be lost by not using stocks and shares Isas to protect investments from CGT.

    Les Cameron, a tax specialist at Prudential, says: “Isas are… a fairly simple way to protect up to £15,000 of your savings a year from unnecessary taxation.

    “While Isas may be perceived as relatively simple products, financial advice is important to fully understand the range of investments available within the Isa wrapper – from stocks and shares to life policies.”

    According to the latest data from the Investment Association (IA), Isas recorded a net retail outflow of £159m in January this year, compared to a net retail outflow of £62m in January 2014.

    Through the five fund platforms that provide data to the IA, including Hargreaves Lansdown, Cofunds, Fidelity, Skandia and Transact, personal pensions had the highest net sales in January 2015 at £309m, with Isa sales reaching £69m.

    Jason Hollands, a managing director at Tilney Bestinvest, notes: “At a time when more and more of the public are being drawn in to the higher rates of tax, and when the election could herald the return of a top rate of 50 per cent income tax, it really does make sense to utilise important tax-efficient allowances such as Isas and pensions while you can.”

    He suggests that any investor who is nervous about investing in markets at this time may want to open their Isa account now with cash and start investing later “on a regular drip-feeding basis”, to avoid missing out on the tax benefits of Isas altogether.

    Gary Chropuvka, portfolio manager for the US Tax Managed and International Tax Managed Funds at Goldman Sachs Asset Management, believes tax-efficient investing has become an increasingly important issue for investors.

    He observes: “So looking for tax-efficient vehicles that will outperform the market, not only on a pre-tax basis but on an after-tax basis, is something we’re seeing more interest in.”

    For Mr Chropuvka, his motto is “it’s not what you earn necessarily, it’s what you keep that counts”.

    “That’s whether you’re talking about your pay cheque or when you’re investing in markets,” he adds. “Avoiding a tax bite is certainly a useful way to accumulate wealth efficiently.”

    Ellie Duncan is deputy features editor at Investment Adviser

    In this special report


    Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

    1. According to the 2015 Tax Actrion report, how much in Isa allowances will be left unused by investors this year?

    2. What is the minimum holding period for a Venture Capital Trust, or VCT, in order to retain the tax benefits?

    3. In what year were Enterprise Investment Schemes (EIS) launched?

    4. Up to how much can a person save in a cash or stocks and shares Isa tax free in a year?

    5. Unused allowances in Isas, pensions, Capital Gains Tax and Inheritance Tax will add up to how much in total tax waste this year?

    6. What percentage is the government targeting for the UK’s final energy consumption to be derived from renewable energy sources?

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