The ‘Starbucks effect’ can cause the most mild mannered tax payer to mutter disapprovingly as international companies shuffle money around the world in search of optimum tax efficiency.

 

The distinction between tax avoidance and tax evasion is well made and the reason a household name such as Google employs legions of tax accountants is simple – it saves them a fortune.

Whilst an adviser may not be able to totally relieve you of any tax burden, there is every chance that by ensuring that you pay no more tax than you need to, you could save thousands of pounds a year.

If you are married you should make the most of tax bands and allowances; if your spouse pays less tax than you, it may be prudent to transfer income-paying investments into their name, thereby benefiting from a lower tax rate.

‘by ensuring that you pay no more tax than you need to, you could save thousands of pounds a year’

Explored in depth elsewhere on this site, an ISA is a powerful weapon in the DIY investor’s armoury.

You can invest up to £15,240 a year (tax years 2015-6 and 2016-7) in a combination of Cash and Stocks and Shares ISA wrappers and once it is sheltered there is no additional tax on income and any capital growth from investments is tax free.

Changes to ISA rules mean that from April 2016 it will be possible to include P2P loans in an Innovative Finance ISA; the Help to Buy ISA was launched in December 2015 to help first time buyers and it is likely that equity crowdfunding investments will be eligible from autumn 2016.

The ISA allowance is an annual contribution limit that cannot be rolled over, once the calendar clicks over to April 6th, the previous year’s allowance is gone forever.

Whereas in the past the tax benefits of an ISA effectively ended with the demise of the account holder, it is now possible to transfer them to a spouse on death.

The other key tax efficiency to exploit is that offered by a pension; tax relief on contributions of up to 45% based upon your personal circumstances mean that for many a pension is the most tax efficient way to save for retirement.

Pensions are individual, so it is worth ensuring that each partner’s allowance is used in the most tax efficient way.

It is also possible to open a pension for a child other non-earner where the government will top up the annual contribution from £2,880 to £3,600.

‘an ISA is a powerful weapon in the DIY investor’s armoury’

An often overlooked allowance is the annual Capital Gains Tax allowance which allows us to make profits each year of up to £11,100 (2015–6) free of tax.  Over the years this can really add up but if it’s not used, that allowance will be lost.

An investment portfolio can be made more tax efficient by taking advantage of this allowance; taking profits each year can ensure that when you want to sell in the future, you haven’t built up unnecessarily large – taxable – profits and profits can be offset against losses.

But you don’t need to lose ISA investments that you still favour. Matching rules mean that you can’t buy back the stock within 30 days and register a profit or loss for tax purposes. However, a ‘Bed and ISA’ transaction means you sell an asset to take the profit but by repurchasing within the tax wrapper, you maintain exposure.

Funds are a tax-efficient on the basis that any tax paid on the rise in their value is not due until the fund is cashed in, and even then it is only due if the gain is above the capital gains tax allowance.

Venture Capital Trusts (VCTs) may be attractive to the sophisticated investor as they offer income tax relief of up to 30% of the investment (up to £200,000)if the VCT is held for five years and are highly tax-efficient.

Premium Bonds and National Savings and Investments Index Linked Certificates both offer tax-free and safe returns.

It’s also important to ensure that your assets are as efficient as possible in terms of the inheritance tax they are likely to incur, and that is explored in greater depth elsewhere on DIY Investor.

 





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