The importance of tax efficient investing in 2025

By MHA

05 Dec 2024

Website
MHA-BTI Logo_black (002).jpg.jpg

With tax thresholds frozen until at least April 2028, a policy move often referred to as the “fiscal drag”, the importance of tax efficient investing has never been more pronounced.

As inflation and rising incomes push more individuals into higher tax brackets without any adjustment to thresholds, the hidden cost of inaction grows steadily.

The direction of travel with tax makes it essential for investors to seek strategies that minimise liabilities while maximising returns.

In this shifting economic landscape, understanding and leveraging tax efficient investments as part of your financial plan can provide a critical edge, ensuring your hard-earned money works harder for you in the years ahead.

Please find several tax efficient investments summarised below:

Individual Savings Accounts (ISAs)
ISAs are tax wrappers within which a wide range of savings and investment products can be held, free of UK income and capital gains tax by anyone aged 18 or over (16 or over for cash ISAs).

They serve as a ‘wrapper’ to fully protect savings from tax, allowing individuals to shelter up to £20,000 each tax year in a range of savings and investments and pay no personal tax on the growth and income received.

The annual ISA allowance can be utilised via stocks and shares, cash or innovative finance ISAs.

Stocks and shares ISAs are in the form of either individual shares, or pooled investments such as open- ended investment funds, investment trusts or life assurance investments.

Cash ISAs are usually contained in a bank or building society savings account. By giving up access to the monies you can fix the interest payable for a period, potentially achieving higher rates of return.

Innovative Finance ISAs are in the form of loans made through peer-to-peer platforms or companies via crowdfunding websites.

You must save or invest in your ISAs by 5th April for it to count for that tax year and if you don’t use the allowance, it is lost. You will also be able to transfer money saved in previous years' ISAs without affecting your current year's annual allowance.

Pensions
Please refer to Charlotte Elgar’s article which breaks down the pension types, tax benefits and various points to consider when looking at pensions: MHA | The Power of Pensions

Offshore Bonds
An offshore bond is a tax-efficient investment wrapper, set up by a life insurance company that is resident in a jurisdiction with a favourable tax regime.

Care should be taken when offshore bonds are first established and at redemption as the structure cannot generally be changed once the plan is created and significant tax liabilities can be triggered on exit.

Similar to ISAs and defined contribution pensions, the amount payable on redemption of the offshore bond is linked to the amount invested and the performance of the underlying assets. Individuals can invest over the medium to long term in different types of assets, including equities, fixed interest securities, property and cash deposits

Whilst the investments remain inside the offshore bond tax wrapper, they will not be subject to Income Tax or Capital Gains Tax (CGT). This is referred to as ‘gross roll up’ and provides the potential for an offshore bond to grow faster than onshore UK bonds or directly held investments thanks to the compounding effect of the deferred tax treatment.

You can therefore switch between different funds within the offshore bond without giving rise to taxable gains unlike directly held investments.

It should be noted that offshore bonds are generally more expensive than other tax wrappers but generally offer greater planning opportunities as a wide range of trusts can be utilised, which offer varying degrees of protection, control, inheritance tax savings and access to the underlying capital.

Venture Capital Trusts (VCTs)
Venture Capital Trusts (VCTs) are specialist tax-incentivised investments that enable individuals to invest indirectly in a range of small higher-risk trading companies and securities. VCTs are companies in their own right and, like investment trusts, their shares trade on the London Stock Exchange.

Shares in qualifying VCTs offer the following tax incentives:

Upfront income tax relief at 30 per cent of the amount subscribed, subject to a maximum investment of £200,000 per tax year. The investment must be held for a minimum of five years in order to retain the income tax relief. Note that income tax relief on the purchase of VCTs is available only where new shares are subscribed, and not for shares acquired from another shareholder.

Dividends received on VCT shares are exempt from income tax in respect of shares acquired within the ‘permitted maximum’ (including shares acquired from another holder).

Gains are exempt from Capital Gains Tax (CGT) and losses are not allowable on the disposal of VCT shares (including shares acquired from another holder).

Advisory Wealth Management
Upfront income tax relief at 30 per cent of the amount subscribed, subject to a maximum investment of £200,000 per tax year. The investment must be held for a minimum of five years in order to retain the income tax relief. Note that income tax relief on the purchase of VCTs is available only where new shares are subscribed, and not for shares acquired from another shareholder.

Enterprise Investment Schemes (EISs)
Tax relief is available where you subscribe for shares qualifying for relief under the Enterprise Investment Scheme (EIS).

Under the EIS, your Income Tax liability for the tax year in which you make your investment, or the previous tax year, may be reduced by up to 30 per cent of the sum invested.

You can invest up to £1m under the EIS in a tax year or up to £2m if you invest at least £1m in knowledge-intensive companies (broadly these are early-stage businesses engaged in scientific or technological innovation).

If you sell your EIS shares at a profit after three years and the Income Tax relief claimed when they were acquired is not withdrawn, there is a Capital Gains Tax (CGT) exemption on the disposal of the EIS shares.

Losses on EIS shares (restricted by Income Tax relief given and not withdrawn) can be offset against gains or, alternatively, against general income in the tax year of disposal or the preceding year.

Inheritance Tax relief (via Business Relief) should be available for EIS shares provided they are held for two years.

In addition, capital gains arising on disposals of other assets may be deferred by reinvesting those gains in a subscription for qualifying EIS shares. The investment in EIS shares must be made in the period beginning one year before and ending three years after the disposal.

Prudent utilisation of the reliefs associated with tax-favoured investments as part of a balanced portfolio can make a big difference to future investment returns, but it is important to consider the risks associated with them and it is essential that professional advice is sought.

Family Investment Companies (FICs)
FICs can be a useful way to protect family wealth across generations, but the most appropriate structure will depend on the family’s circumstances and objectives.

A FIC enables parents and grandparents to retain control over assets whilst also protecting and enhancing wealth in a tax-efficient manner.  Care should be taken with the structuring and funding of a FIC to ensure that the directors can invest tax efficiently and ensure future growth is protected.

Profits and gains made by a FIC will be subject to corporation tax at 25 per cent, where these exceed £250,000.  A lower rate of 19 per cent will apply where profits are not more than £50,000.  Therefore, in many cases, this will still be lower than if the investments had been held directly or via trust, and suffered income tax at 40 per cent/45 per cent, and capital gains tax at a maximum of 24 per cent.

If the company receives UK dividend income from investments in shares, this will be exempt from tax. However, other income, such as bank interest or rents from investment properties, will be taxable. Losses from a FIC’s rental business can be offset against other income in the company.

A FIC should be considered for long-term asset protection planning, as well in terms of the income needs of the family. Shareholders only pay tax personally when the FIC distributes income, or if it is wound up. There is merit in using a FIC to allow profits to be retained in the company until required and drawn when the individual’s personal tax rate may be lower.

Any investment gains and income could be paid into a pension plan for the benefit of the shareholders; therefore, it is recommended that parties to a FIC receive independent financial advice.

If you are seeking to preserve family wealth within a controlled family environment and/or wish to consider introducing the next generation into the decision-making about investments, please speak to a member of the MHA tax team about how a FIC could benefit you.

Risk warnings

The information provided within this article should not be construed as a personalised recommendation. Whether or not the investments highlighted are suitable for you, will depend on your individual objectives and circumstances. You should not take any action without seeking formal advice.

Contact MHA for more information

Enjoyed this? Read more from MHA

Latest news

1

Beever and Struthers advise on £1.5bn funding for 2,000 new social homes a year John Jones

Beever and Struthers advise on £1.5bn funding for 2,000 new social homes a year

03 Jul 2025

2

Airframe Designs aligns with US programme for additive manufacturing growth Additive manufacturing technology unit At Airframe Designs

Airframe Designs aligns with US programme for additive manufacturing growth

03 Jul 2025

3

Panache Cruises on course for further growth with support from Rosebud James Cole

Panache Cruises on course for further growth with support from Rosebud

03 Jul 2025

4

Lancashire emerges as key player in UK's Defence and Tech Sector Mo Isap Chair Of The Lancashire Business Board Nick Miles National Cyber Force Deputy Director For Samlesbury Annette Weekes Representative Of The NWRDSC

Lancashire emerges as key player in UK's Defence and Tech Sector

03 Jul 2025

5

Report shows impact of BAE Systems in Lancashire BAE Systems Radar

Report shows impact of BAE Systems in Lancashire

02 Jul 2025

Background image for hub sign up block

LBV Hub

Leverage Lancashire Business View platforms

Post your news
Post your events
Post your offers
Build your network
Improve your SEO
Gain coverage in the magazine
Sign-up
Events
LBV123 July/August Launch Event
Lancashire Business View magazine launch
Networking
16 Jul 2025

LBV123 July/August Launch Event

Burnley

08:30 - 10:30

Lancashire Built Environment Conference 2025
BEC 315 X 315 Px
Networking
25 Sep 2025

Lancashire Built Environment Conference 2025

Blackpool Football Club, Blackpool, FY1 6HX

08:30 - 13:00

CMI Level 5 Project Management Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Project Management Course

Preston Campus, Preston, PR1 2HE

08:00 - 17:00

CMI Level 5 Management and Leadership Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Management and Leadership Course

Preston Campus, Preston , PR1 2HE

09:00 - 17:00

The Marketing Metrics that Matter – July 4
LBV Hub Seminars
04 Jul 2025 - 04 Jul 2025

The Marketing Metrics that Matter – July 4

Door4 Office, Burnley Wharf, Burnley, BB11 1JG

08:30 - 11:00

Tri-Site Survey Equipment Showcase
unnamed (2).jpg.jpg
LBV Hub Seminars
09 Jul 2025 - 09 Jul 2025

Tri-Site Survey Equipment Showcase

Crow Wood Hotel, Burnley, BB12 0RT

09:30 - 16:00

Choose Chorley for Business - Talent Reimagined Business Breakfast
talentreimaginedbb.png.png
LBV Hub Seminars
10 Jul 2025 - 10 Jul 2025

Choose Chorley for Business - Talent Reimagined Business Breakfast

Strawberry Fields Digital Hub, Chorley, PR71PS

08:00 - 10:30

Blackburn Cathedral hosts Champagne and Diamonds Event with Ainsworth Jewellers
Champagne-Jewellery 10 07 25_page-0001.jpg.jpg
LBV Hub Awards
10 Jul 2025 - 10 Jul 2025

Blackburn Cathedral hosts Champagne and Diamonds Event with Ainsworth Jewellers

Blackburn Cathedral, Blackburn, BB1 5AA

18:00 - 20:30

Shaping Preston's future by remembering its past
1750160034867.png.png
LBV Hub Networking
16 Jul 2025 - 16 Jul 2025

Shaping Preston's future by remembering its past

Society1, Coworking Space, Preston, PR1 3LT

18:00 - 20:30

Chamber Summer BBQ
LBV Hub Social
17 Jul 2025 - 17 Jul 2025

Chamber Summer BBQ

The Borough, Dalton Square, Lancaster, LA1 1PP

17:30 - 20:00

Preston Tech Connection: Web3 is Dead. Or is It?
July Longer Banner.jpg.jpg
LBV Hub Networking
29 Jul 2025 - 29 Jul 2025

Preston Tech Connection: Web3 is Dead. Or is It?

Society1, Coworking Space, Preston, PR1 3LT

18:00 - 19:30

Preston Freelancer Meet-Up: July
Longer July Banner.jpg.jpg
LBV Hub Networking
31 Jul 2025 - 31 Jul 2025

Preston Freelancer Meet-Up: July

Society1, Coworking Space, Preston, PR1 3LT

10:00 - 11:30

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more LBV122 Online Graphic
Subscribe now

Weekly news bulletin