If you’re looking for information on making the most of savings and investments, Hodge Bakshi can help. We have worked with a broad range of clients from across the Cardiff area and would be happy to assist you.
From pension savings to alternative savings, investment strategies are often made up of a range of different elements. Early planning is essential: this is a continuous process, and it is important to monitor your financial plans regularly, to ensure that they remain up to date and that you stay on course to achieve your financial goals.
A realistic approach
Being realistic about your objectives is crucial when putting together a financial plan. This requires a balancing act between your ‘head’ (financially prudent strategies) and your ‘heart’ (emotionally acceptable thresholds). We can help you bridge the gap between what you can expect financially and what you dream of achieving. One approach is to set a number of short, medium and long-term goals and prioritise them within each category, in order to meet your objectives.
Setting your financial goals
Some typical financial goals might include:
- being able to retire comfortably
- having sufficient funds and insurance cover in the event of serious illness or loss
- accumulating a sizeable estate to pass on to your heirs
- increasing the assets that will pass to your heirs by using various estate planning techniques, perhaps including a lifetime gifts strategy
- tying in charitable aims with your own family goals
- raising sufficient wealth to buy a business, holiday home, etc
- developing an investment plan that may provide a hedge against market fluctuations and inflation
- minimising taxes on income and capital.
Your investment strategy
Records show that in the long-term, share investments outperform bank and 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. Choosing the wrong investment may mean you get back less than you invested. Considering the most important factors that apply to you is a vital part of your investment strategy.
Tax-efficient savings and investments
If at all possible, paying tax on your savings and investment earnings is to be avoided. A number of investment products exist that produce tax-free income.
Premium Bonds offer a modest ‘interest equivalent’, but there is a chance of winning a tax-free million! The Premium Bonds investment limit is £50,000.
Stocks and shares
Investment in stocks and shares has historically provided the best chance of long-term growth. Investment in open-ended investment companies (OEICs), investment trusts and exchange traded funds are designed to spread the risk, compared to holding a small number of shares directly. Capital gains and dividends are charged to tax. A Dividend Tax Allowance of £1,000 a year is available (reducing to £500 for 2024/25). The rates of tax on dividend income above the allowance are 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
Bank and building society accounts
Bank and building society accounts do offer:
- a higher degree of certainty over investment return (spread large amounts over several banks, though); and
- (usually) ready access to your funds.
The Personal Savings Allowance (PSA) removes some income from income tax – up to £1,000 of a basic rate taxpayer’s savings income and up to £500 of a higher rate taxpayer’s income. No PSA is available to additional rate taxpayers. Additionally, some taxpayers with amounts of non-savings income no higher than the personal allowance also benefit from the £5,000 starting rate for savings band, with a rate of tax of 0%.
Investing in property
Property is typically considered a long-term investment. 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.
Landlords are not able to deduct their finance costs from their residential property income, they instead receive a basic rate reduction from their income tax liability. The restriction to finance costs does not apply to landlords of furnished holiday lettings.
Individual Savings Accounts (ISAs)
The overall annual subscription limit for ISAs is £20,000 for 2023/24. Individuals can invest in a combination of ISAs up to this limit, and may involve a single plan manager or separate managers, handling separate elements. However, a saver may only pay into one of each type of ISA each year.
16 and 17-year-olds can invest in an adult Cash ISA. A Junior ISA is available to all UK resident children under 18 as a Cash or Stocks and Shares product or both. Total annual contributions are capped at £9,000. Junior ISAs are owned by the child but investments are locked in until adulthood.
All investments held in ISAs are free of capital gains tax (CGT) and there is no minimum investment period for funds. However, some plan managers offer incentives, e.g. better rates of interest, in return for a commitment to restrictions, such as a 90-day notice period for withdrawals – therefore, it is worth shopping around.
Any adult under 40 is able to open a Lifetime ISA. They can save up to £4,000 each year, and will receive a 25% bonus from the government for every pound they put in, up to the age of 50. Funds can be used to save for a first home worth up to £450,000, or for retirement. If the fund is not used for a first home purchase, the funds cannot be withdrawn without a penalty unless an individual is aged 60 or over, or terminally ill, with less than 12 months to live. A withdrawal charge is made if cash or assets are withdrawn for any other reason.
The Innovative Finance ISA
This ISA is designed to encourage peer-to-peer lending. It can be offered by qualifying peer-to-peer lending platforms. Loan repayments, interest and gains from peer-to-peer loans are eligible to be held within an Innovative Finance ISA, tax-free. Returns have the potential to be significantly greater than on Cash ISAs, but they will carry a greater degree of risk.
Some alternative investment schemes
Although generally higher risk, the tax breaks aimed at encouraging new risk capital mean that the following schemes could have a place in your investment strategy.
Enterprise Investment Scheme (EIS)
Subject to various conditions, EIS investments attract income tax relief, limited to a maximum 30% relief on £1 million of investment per annum. The £1 million annual limit is increased to £2 million for individuals making EIS investments in knowledge-intensive companies (KIC), provided that anything above £1 million is invested in one or more KIC. A deferral relief is available to rollover chargeable gains where all or part of the gain is invested in EIS shares (within the required period).
Although increases in the value of shares acquired under the EIS 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.
Venture Capital Trusts (VCTs)
These bodies invest in the shares of unquoted trading companies which would qualify for receipt of investment under the EIS. An investor in the shares of a VCT will be exempt from tax on dividends and on any capital gain arising from disposal of the shares in the VCT. Income tax relief of 30% is available on subscriptions for VCT shares, up to £200,000 per tax year, as long as the shares are held for at least five years.
Seed Enterprise Investment Scheme (SEIS)
This provides income tax relief of 50% for individuals who invest in shares in qualifying companies, with an annual investment limit for individuals of £200,000 and a cumulative investment limit for companies of £250,000, and provides a 50% CGT relief on up to £100,000 gains per annum realised on disposal of an asset and invested through the SEIS.
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 are held for at least three years.
Your next steps: contact us to discuss…
- Creating a savings and investment strategy
- Establishing and achieving your savings goals
- Tax on income and gains
- Investing for your retirement
- Tax-free investments
- The tax consequences of different investments
If you are in the Cardiff area and would like advice on personal tax planning strategies, please contact Hodge Bakshi.