Banking 101 –
How to be Tax-Efficient: Structuring Your Wealth
Find out which allowances and structures can help you increase tax efficiency. Protect and grow your wealth with guidance around how to be tax efficient.
Tax is one of the few certainties in life; higher income and bigger gains mean a higher potential tax liability. There are, however, many ways to structure your finances to increase tax efficiency.
Why is it important to structure your assets tax-efficiently when you're a high-net-worth individual? Simply put, better tax efficiency helps you to protect and grow your wealth and enables better investment returns. The use of relevant tax allowances and exemptions can make all the difference in achieving personal financial objectives.
A wealth planner can advise you on how to be tax-efficient and how to measure tax efficiency to grow your wealth and achieve your short and long-term goals. The use of the below allowances and structures can be key elements of a personalised tax-efficient wealth plan, aligned to your objectives.
How to be tax-efficient: UK investor tips
Everyone has a tax-free income tax personal allowance of up to £12,570 (2021/2022 tax year), which can be bolstered by the Personal Savings Allowance.
An individual has a dividend allowance of £2,000 (2021/22 tax year) to set against any dividend income, with no tax being due on this amount.
Capital gains tax exemption
Capital gains (gains arising from disposals of certain capital assets) of up to £12,300 are exempt from tax in the 2021/22 tax year.
Stocks and Shares ISA
Individual Savings Accounts (ISAs) are among the most tax-efficient investment wrappers available. Assets within an ISA are not subject to Income Tax or Capital Gains Tax and can generally be accessed at any time. Individuals can invest up to £20,000 per tax year (2021/22 ISA allowance) into an ISA.
Pension Annual Allowance
Qualifying Pension contributions are tax relievable at the saver's marginal income tax rate. The annual allowance is currently capped at £40,000 (the tax year 2021/2022), although a lower limit of £4,000 may apply if you have already started accessing your pension. Unused annual allowances for the preceding three tax years may be used subject to having enough taxable relevant earnings in the year of making a pension contribution. Funds can be accessed from age 55 (under current rules), with 25% paid tax-free subject to Pension Lifetime tax limits.
Enterprise Investment Scheme (EIS)
An investor who subscribes for shares in an EIS qualifying company can obtain an upfront income tax reduction of up to 30% on investments of up to £1m each year. There are many other tax advantages, including tax-free capital gains after completion of the required holding period.
Venture Capital Trusts (VCTs)
An investment into qualifying VCT shares enables an investor to claim several tax incentives on investments up to £200,000 each year. Any dividends paid from the investment will be tax-free.
Inheritance Tax (IHT) advantaged Investments
Some investments have IHT advantages. Holding the qualifying investment at death may allow IHT exempt assets to be passed to beneficiaries.
However, no two wealth plans are identical. The right wealth planner will help you develop a strategy for how to be tax-efficient and develop a plan to meet your specific needs. The aim is to help you grow, protect and pass on your wealth through sound strategic management of your finances.
You should seek professional advice before making any investment decision. The value of investments and the income from them can fall and rise, and you could get back less than you invest. Past performance is not a reliable indicator of future results. Taxation rates and allowances are subject to change.
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