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Note: This guide will be updated for the 2014/15 tax year in May.

Making the most of savings and investments

Investing in your financial future

Financial planning is an ongoing process, and your plans should be monitored and adjusted regularly to reflect any changes in your circumstances, and to ensure that you are continuing to move in the right direction.

Being realistic about your objectives is important when putting together any financial plan. We can help you with this process.

Defining your objectives

Putting together a realistic plan can be a balancing act between your head (financially prudent strategies) and your heart (emotionally acceptable thresholds).

You need to bridge the gap between what you can expect financially and what you dream of achieving.

Try setting a number of short, medium and long-term goals and prioritise them within each category, in order to meet your objectives.

Some key financial goals

  • Increase the assets going to your heirs by using various estate planning techniques, perhaps including a lifetime gifts strategy
  • Accumulate a sizeable estate to pass on to your heirs
  • Tie in charitable aims with your own family goals
  • Raise sufficient wealth to buy a business, a holiday home, etc
  • Develop an investment plan that may provide a hedge against market fluctuations and inflation
  • Be able to retire comfortably
  • Have sufficient funds and insurance cover in the event of serious illness or loss
  • Minimise taxes on income and capital.

Saving or investing?

When defining your financial strategy, it is important to understand the difference between saving and investing.

If you save money on deposit with a bank or building society, you will earn interest. If you buy shares or invest in a share-backed plan such as a unit trust or a life assurance policy, you will have the opportunity to earn dividend income and benefit from capital growth as the investments increase in value.

Records show that in the long term the best share investments outperform the best building society accounts in terms of the total returns they generate.

However, it is important to remember that shares can go down in value as well as up, and dividend income can fluctuate. If you choose the wrong investment you could get back less than you invested.

You will need to consider the most important factors that apply to you, as part of your investment strategy.

Some tax-efficient products

Paying tax on your savings and investment earnings is obviously to be avoided if at all possible. There are a number of investment products that produce tax-free income, including some National Savings products.

National Savings

Although the products on offer from National Savings may not be at the cutting edge, they are nevertheless worth careful consideration. Premium bonds may be quoted as offering a modest ‘interest equivalent’, but there is a chance of winning a tax-free million!

Investment bonds

If you have a lump sum to invest, you might consider an investment bond. This is a life assurance product and the norm is to draw an annual tax-free sum equal to 5% of the original investment for the life of the bond. On maturity, usually after 20 years, any surplus is taxable, but with a credit for basic rate tax. Higher rate tax might be payable, but a special relief (known as ‘top slicing’ relief) may be available to reduce the burden.

Stocks and shares

Historically, investment in stocks and shares has provided the best chance of long-term growth. On the other hand, it can be a volatile market, and should perhaps be avoided by those looking for more security. Investment in unit trusts and investment trusts are designed to spread the risk and add an element of management for the small investor, without the expense of broker advice. Capital gains and dividends are charged to tax.

Bank and building society accounts

While history records that long-term investment in shares should outperform savings with a bank or building society, you should not overlook (a) the higher degree of certainty over investment return (spread large amounts over several banks, though), and (b) the (usually) ready access to your funds. Remember that interest is liable to income tax.

Considering property

Property is generally considered a long-term investment, whether commercial or residential.

‘Buy to let’ mortgages will generally be available to fund as much as 75% of the cost or property valuation, whichever is the lower.

Those investing in property seek a net return from rent which is greater than the interest on the loan, while the risk of the investment is weighed against the prospect of capital growth.

Investing in an Individual Savings Account (ISA)

Up to £11,520 can be invested in an ISA this tax year.

Those investing have the option to invest the full £11,520 in stocks and shares, or up to £5,760 in cash and deposits, with the balance up to the maximum in stocks and shares.

Investors may choose to invest up to the limit with a single plan manager who can provide both elements, or to invest with separate managers, each handling separate elements.

16 and 17-year-olds are able to invest up to £5,760 in a cash ISA.

Following the closure of the Child Trust Fund (CTF) to new entrants early in 2011, a tax-free Junior ISA (JISA) is now available to all UK resident children under the age of 18 who do not have a CTF account, as a cash or stocks and shares product.

However, annual contributions are capped at £3,720. Funds placed in a JISA will be owned by the child but investments will be locked in until the child reaches adulthood.

Although most income accruing in an ISA does so tax-free, the tax credit on UK dividend income cannot be recovered. All investments held in ISAs are free of CGT.

There is no minimum investment period for funds invested in ISAs – withdrawals can be made at any time without loss of tax relief.

However, some plan managers offer incentives, such as better rates of interest, in return for a commitment to restrictions such as a 90-day notice period for withdrawals. It is worth shopping around online for the best deals, particularly with interest rates for many ISAs currently being relatively low.

Alternative investments

Investments under the Enterprise Investment Scheme (EIS), the Seed Enterprise Investment Scheme (SEIS) and investments in Venture Capital Trusts (VCTs) are, generally, higher risk.

However, tax breaks aimed at encouraging new risk capital mean that EIS and VCT investments may have a place in your investment strategy.

The Enterprise Investment Scheme: Subject to various conditions, such investments attract income tax relief, limited to a maximum 30% relief on £1m of investment per annum. The effective maximum investment for 2013/14 is £2m, if £1m is carried back for relief in 2012/13 – speak to us for more details, as restrictions apply.

In addition, a deferral relief is available to rollover any chargeable gain where all or part of the gain is invested in the EIS shares.

Although increases in the value of shares acquired under the EIS up to the £1m limit are not chargeable to CGT (as long as the shares are held for the required period), relief against chargeable gains or income is available for losses.

The gross value of the company must not exceed £16m after the investment and there are many restrictions to ensure that investment is targeted at new risk capital. Companies must also have fewer than 250 full-time employees (or the equivalent), and have raised less than £5m under any of the venture capital schemes in the 12 months ending with the date of the relevant investment.

The Seed Enterprise Investment Scheme (SEIS) provides income tax relief of 50% for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £100,000 and a cumulative investment limit for companies of £150,000, and provides a 50% CGT relief on gains realised on disposal of an asset in 2013/14 and invested through the SEIS in the same or following year. A gain on the disposal of SEIS shares will be exempt from CGT as long as:

  • the shares obtained income tax relief, which has not been withdrawn, and
  • the shares are held for at least three years.

Venture Capital Trusts: With similar restrictions on the type of company into which funds can be invested, VCTs allow 30% income tax relief on investments up to £200,000 each tax year but no CGT deferral.

Gains and dividends on VCT shares within the investment limits are tax exempt, although tax credits are not repayable and losses are not allowable.

Follow-up – Contact us about…

  • Creating a wealth building strategy
  • Establishing and achieving your savings goals
  • The difference between saving and investing
  • Tax on income and gains
  • Investing for your retirement
  • Tax-free investments
  • The tax consequences of different investments
  • Tax shelter investments