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How to invest tax-efficiently

When applied correctly, ‘tax wrappers’ are a way to save income tax, capital gains tax, inheritance tax, and/or corporation tax – you might even be able to receive tax relief.

They are called tax wrappers because they ‘wrap’ the underlying investments and help determine how they are taxed.

There are a variety of tax wrappers, including ISAs and pensions. The right option for you will depend on your circumstances, needs and objectives.

As you may know, there is a difference between a ‘cash ISA’ and a ‘stocks and shares ISA’. But you may not be aware how flexible they are. If you have a non-flexible ISA, you can easily change to a flexible one, because the new provider will do most of the work for you. You can also transfer your money between each type of ISA.

‘Stocks and shares ISAs’ are not investments in themselves. To have the best opportunity for superior growth or income at a comfortable risk level, you need the right spread of investment funds within your ISA. It’s usually better to hold investment funds rather than individual shares.

The value of your investment can go down as well as up and you may get back less than you have invested.

Stocks and Shares ISAs do not include the same security of capital which is afforded with a cash ISA.

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When you can access your investments

You need to understand any restrictions on access. The right investment depends on how urgently you will need to withdraw the money. For example:

Accessible investments: For most investments we arrange, the money can be accessed within a few days
Enterprise Investment Schemes: At least three years and probably longer
Venture Capital Trusts: Minimum five years
Pensions: Only accessible when you reach a certain age

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How to convert taxable gains into tax-free investments

Once your investments have grown over a number of years, and when you realise your gains, you risk having to pay Capital Gains Tax. (This does not apply to pensions and ISAs.)

Each year, a certain amount is exempt from CGT – but you can’t carry any exemption forward. If you don’t use it, you lose it.

Currently exempt: The first £11,100 of realised gains per person per year. After that, CGT is payable at 18% or 28% on property, or 10% or 20% on investments.

We recommend you talk to your adviser regularly, to manage your gains, use your annual exempt amount, and keep your portfolio free of tax penalties. If you leave it too late, it may become unmanageable.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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How to use the dividend tax allowance to your advantage

From 6 April 2016, there is a new dividend tax allowance:

First £5,000: Tax-free
£5,001 and over: Taxed at 7.5% (basic rate), 32.5% (higher rate), 38.1% (additional rate)

If you own a limited company, and pay yourself with dividends, the dividend tax allowance and associated increases in tax rates mean you will have to pay more tax.

If you have more cash than you need for emergencies, or invest in taxable accounts (that is, outside pensions and ISAs), you could make good use of this allowance and pay less tax at a comfortable level of risk.

Source: Dividend Allowance Factsheet

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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We can help!

Having been financial advisers since 1994 or earlier, investments and wealth management are the core part of our expertise. We’ve given effective financial advice to thousands of clients over the years. You can be confident we can help you too.

To arrange your initial appointment, please contact us on 020 8891 0711 or hello@globeifa.co.uk