Tax-efficient investing is a big part of many clients’ needs: many are high-net worth clients, and will be on a higher rate tax bill and looking to mitigate some of that liability.
But tax-efficient investing has become more of a challenge in recent years, when some perfectly legitimate schemes have been heavily criticised, and become unavailable to many people, fearful of the taxman, despite the arrangements being considered tax avoidance, rather than evasion.
Nonetheless, a number of vehicles are available that come completely without controversy, that are useful to advisers and clients, especially at this time of year.
Pensions are “as good as it gets” when it comes to tax planning, according to Ian Browne, pension expert at Quilter.
This is because of the “EET” concept; that is the money is exempt from tax on the way in, exempt when it is invested and taxed on the way out.
On top of this, you have access to a totally tax-free lump sum at the age of 55 of 25 per cent of the pension pot value.
Mr Browne says: “There’s a lot of incentive to contribute to a pension. If you’re a basic-rate taxpayer you get basic-rate relief, so you don’t have to pay tax on that income that you’ve earned. After paying tax, the government will then put that tax into your pension.
“Say if you pay £8,000 into your pension, you will have paid £2,000 on that money. What the government will do, it will put that £2,000 you’ve paid into your pension.
“From a financial advice perspective, you’re more likely to be dealing with people who are higher-rate taxpayers and they get even more tax relief.”
On top of this, if you are a higher-rate taxpayer, you are getting even more from the government, as you get tax relief at the higher rate, but get taxed at the lower rate when you draw an income.
Mr Browne says: “These promises are really powerful from a pensions perspective. Knowledge of these tax reliefs and how it works really make a difference when encouraging people to engage with their pensions.”
Venture capital trusts
VCTs are incredibly popular, and are a means by which the government brings in money to young companies needing capital. Not all of them will necessarily be successful, but the VCT is run by a professional manager, who selects the companies to invest in.
A client will invest a certain amount of money into the VCT, and can claim that amount back on his tax bill at 30 per cent. This means that if a client invests £20,000 in a VCT, he will get £6,000 of that back that he can offset against his tax.
This will only work up to that amount he has paid in tax to start with, so if he has only paid tax of £6,000 that year, he cannot claim more than £6,000 through the VCT.
Questions appear on the last page of this article.