Why Now Is The Best Time For Tax Efficient Investments

Why Now Is The Best Time For Tax Efficient Investments
Underwater by Julian Cohen. Why?

Whilst SIPP and SSAS are two types of tax efficient investment, here are a variety of other ways to reduce your tax liabilities, all of which are approved by HMRC.

Whatever Your Tolerance To Risk, You’ll Find Tax Efficient Investments, Including Those That Are Fully Protected By The Government Up To £1 Million

An Overview Of Tax Efficient Investments

None of us likes to pay more tax than is necessary.  So getting to grips with HMRC approved tax efficient investments is a pretty smart move.

There’s no doubt that the whole area of tax efficient investments has become more of a challenge in recent years.  HMRC has rightly been on the warpath to close down schemes that exploit the rules and are more akin to tax evasion rather than legitimate tax avoidance.

Whilst some tax efficient investments are on the fringes of acceptability, the good news is that there are quite a number of tax efficient investments that have been around for ages, and come completely without controversy.

With under two months to the end of the tax year, we’re now well into the busiest time of the year for tax efficient investments.

So as you look towards the things you can do to mitigate your tax bill, here’s a summary of the most popular tax efficient investments.

Pensions Including SIPP And SSAS

With huge flexibility on where you can invest your money, pensions are widely reckoned to be about the best tax efficient investment when it comes to tax planning.

At the present time, money invested into pensions is free of tax.  It’s virtually free of tax once it’s sheltered inside the pension wrapper.  And it’s only taxed on the way out.  Sometimes!

It’s ‘sometimes’ because from age 55, you can draw up to one quarter of your pension fund tax free. 

And in addition to pensions not being subject to Inheritance Tax, if you die before age 75 without drawing the benefits, your fund is tax free.

To encourage you to build your pension fund, contributions attract tax relief at your highest rate.  Though in recent years, the amount you can save has been dramatically slashed, limiting the amount you can add to your investment.

It’s had a major effect.  More than one million over-55s have been subject to the Money Purchase Annual Allowance since it was introduced in 2015, limiting their maximum contribution to £4,000 per year.

And if you think that’ll be the end of it, think again.

Figures released by HMRC on 31 January 2019 showed a forecast cost of pension tax relief of £43.7 billion for 2018/2019.  It’s up £2 billion on the previous year.

According to FTAdviser, Chancellor Philip Hammond said he considers tax relief to be “eye-wateringly expensive”.

So if you haven’t ‘maxed out’ your SIPP and SSAS contributions for this tax year, give it some serious thought.

Individual Savings Account (ISA)

An ISA allows you to hold cash, shares, and unit trusts free of tax on dividends, interest, and Capital Gains.

In addition, many peer-to-peer platforms have launched an Innovative Finance ISA, so you can earn your interest tax free. 

And there are Help-To-Buy and Lifetime ISAs too.

The maximum you can put into ISAs in the 2018-19 tax year is £20,000.  It can be invested entirely into one type of ISA, although some ISAs may have reduced limits.  Or it can be spread across different varieties of ISA.

Premium Bonds

Premium Bonds from National Savings And Investments have been around for decades as a tax efficient investment.

While some people might consider it a form of gambling, Premium Bonds allow you to invest up to £50,000 into the ‘prize draw’.  Prizes range from £25 to £1 million, all of which is paid out tax free.

It’s fair to say the odds aren’t great.  The chance of winning £25 is 1 in 24,500.  And your chance of winning £1 million is 1 in 35,926,766,878.

Premium Bonds allow easy access, so if your winnings aren’t at the level you’d like, you can cash out without losing any of your stake. 

Venture Capital Trusts (VCT)

VCTs are tax efficient investments designed to attract money into young companies needing capital. 

A VCT is run by a professional manager.  It selects the companies in which to invest. 

Given the infancy of the businesses, it’s high risk investment, with the likelihood that many of the companies will fail.  Generous tax reliefs are on offer to offset this.

Subject to investment limits, your investment qualifies for Income Tax relief at 30 per cent.  You have to hold the investment for five years. 

Enterprise Investment Scheme (EIS)

An EIS works on similar principles to a VCT, but it offers slightly more attractive tax incentives.

That’s because companies raising EIS money are higher risk, as they are at an early stage of their development.

You can invest up to £1 million each year into a qualifying company, for which you’ll receive 30 per cent Income Tax relief.

Once you’ve held your investment for three years, the gains are free of Capital Gains Tax and Inheritance Tax.

To reduce your investment risk, it’s often wise to invest in an EIS fund rather than in a single company.  A variety of EIS funds are available, with some being general in nature, and others focusing in a specialist area, such as leisure.

Seed Enterprise Investment Scheme (SEIS)

SEIS is similar to EIS, but the companies into which you invest are at an even earlier stage of development, and always less than two years old.

As the risk profile has increased yet again, you’ll secure even greater tax relief, making it one of the most generous tax efficient investments. 

It’s worth a whopping 50 per cent Income Tax relief on your investment. 

As a result of the generous tax breaks, you’re limited to a maximum investment of £100,000 each year.  To reduce your risk, it’s a good idea to consider spreading your investment across a number of companies.

Alternative Investment Market (AIM)

If you want to mitigate your Inheritance Tax bill, you can invest in AIM shares.  They’re exempt from this tax if they’re held for more than two years, as they qualify for Business Property Relief.

However, AIM shares are considered by many to be very risky investments, leading some experts to conclude the risks far outweigh the tax advantages.

But if you happen to pick the right companies, the growth potential can be significantly higher compared with larger firms.


Profits from woodlands run on a commercial basis are free from Income Tax and exempt from Capital Gains Tax.  There can also be some Inheritance Tax benefits.

However, the costs of acquisition can be high, so this area of tax efficient investment is likely to appeal to a very small number of wealthy people.

Tax Efficient Investments And More

If you’re looking to minimise your liability to a variety of taxes, we have a whole area of SIPPclub dedicated to it.

It covers 15 separate areas of personal and business tax reduction, and includes tax efficient investments.

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AJ Bell Is Often The Best Value SIPP For Stockmarket Assets

That's our opinion.  Not just because AJ Bell was the first company to offer an online SIPP.  Nor that it's received many prestigious awards.  And not even because the wife of SIPPclub's Founder has an AJ Bell SIPP.  It's because it's one of the most competitive stockmarket SIPPs on the market. 

Over time, charges can wipe out a huge part of your fund.  We like AJ Bell because there are no set-up costs.  If you hold passive funds, which is our preference, or shares, investment trusts, EFTs, gilts or bonds, you pay one small fixed fee no matter how large your fund.  And when you come to draw your benefits either as occasional drawdown or UFPLS payments, there's a small charge for the whole year no matter how many times you access your money (many SIPP and SSAS providers charge more than this for each payment).  However, you should always compare charges in detail, because AJ Bell could be more expensive than other providers, depending on the type of stockmarket assets you hold.

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