Top 10 tax-efficient investing vehicles

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.

The investor has to hold the investment for five years, and you access it by buying shares in a new issue, while cashing in by selling the shares.

Clearly this does not work with people who pay no tax as they will not get any benefit, and for high-net worth taxpayers who are paying 40 per cent, there will be a 10 percentage point disparity.

But understandably this tax incentive is incredibly popular, not least because of changes to the pension allowance rules brought in a few years ago.

Andy Gadd, head of research at Lighthouse Group, says: “You used to be able to put £255,000 in a pension [each year]. They’ve reduced it to £40,000, and for some high-net worth people you can only put £10,000 into a pension.”

Most advisers opt to invest their clients in an EIS fund rather than a single company. It is worth thinking whether to invest in a specialist fund.John Glencross

The other problem is that it is very easy to go over the allowances, in which case you would get fined by HM Revenue & Customs, and to pay that fine, you cannot resort to taking your money out of your pension.

Mr Gadd says: “VCTs are the next best area they could consider investing in. But it’s high risk, so don’t let the tax tail wag the investment dog. 

“The very generous tax relief where you get 30 per cent income tax relief isn’t the reason you should buy a VCT. Where’s it going to invest the money?”

EIS

This is another, more risky way of mitigating tax, and work on similar principles to VCTs in that the government is trying to encourage investment into early stage companies.

Investors can invest as much as £1m a year into a qualifying company, for which they receive 30 per cent income tax relief. Once held beyond three years, the investment gains are free of capital gains tax and exempt from inheritance tax as well.