Tax Efficient Investments

Once we have assessed your current and future cash flow situation, together we will start to form the basis of your plan. At this point we may want to start thinking about the details of your investment portfolios. It then becomes important to discuss ‘tax wrappers’, of which there are a number available. Put simply, a tax wrapper refers to the tax conditions that an investor can ‘wrap’ around their investment, so that they are sheltered from paying some or all tax on it. Most of these can hold a variety of investment types and often hold the same funds, depending on your circumstance. Below is a breakdown of the wrapper types and what their main features are.


These wrappers are generally available in two flavours; cash or stocks & shares. The former is essentially a savings account within a tax wrapper and the latter generally features investment funds or shares within the wrapper. Any interest or income within the wrapper is free income tax and any growth, when realised, is free from capital gains tax. There are now a few different varieties of ISA available with additional benefits.

Junior ISAs are available to those under 18 and were introduced to replace child tax credits. The limits on contributions are less than the full adult NISA but the principle is much the same. They allow parents and family to invest for their children tax efficiently, perhaps providing for University fees in the future.

Help to Buy ISAs were created with first time buyers in mind. They allow you to invest in a similar way but with the added advantage of having a matching element from HMRC. This means your ISA could be enhanced, so long as it’s used for purchasing a first home. It’s a very easy way for first time buyers to get a boost to their deposits.

Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.

Tax treatment varies according to individual circumstances and is subject to change.

Personal Portfolios

The personal portfolio, also referred to as a General Investment Account or GIA is not a tax wrapper in itself. In fact, it is the part of a portfolio that doesn’t fall in to a tax wrapper. However, that does not mean there are no tax breaks. In any portfolio, it is important to consider all the personal tax allowances and this is where they would be used. Most people will be using up their personal income tax allowance each year, however, we don’t always use our savings allowance and dividend allowance. These are worthwhile using each year. Additionally, everyone has a capital gains tax allowance. If these allowances are not used each year, they are lost. With careful management of a personal portfolio, income and growth can be accumulated tax free using these allowances.

Investment Bonds

An investment bond is distinctly different from a cash bond that you may take out through a bank. They are commonly referred to as insurance bonds and are technically a form of life insurance contract. This technicality means that they are treated differently for tax purposes and can provide valuable benefits, especially when estate planning. There are two tax variants of investment bonds; Onshore and Offshore.

The Onshore investment bond will normally pay income tax on any income or growth within the wrapper. This is at the basic rate of 20%. However, withdrawals can be made each year from a bond that, if within 5% per annum cumulatively, can be treated as withdrawals of capital. This has the benefit of allowing bond owners to withdraw an ‘income’ from the bond of up to 5%pa without paying tax on it. Of course, all the growth within the bond is still taxable and so is effectively deferred. When withdrawing growth from the bond, it is usually taxed at your marginal rate with an allowance for the tax already paid. Using the allowed withdrawals and managing your marginal rate, we can potentially withdraw the growth with no further tax payable, even if during ownership you were a higher or additional rate tax payer. This feature of deferring tax payable also make bonds essential to any estate planning that includes the use of trusts.

The offshore bond has a very similar makeup to the onshore bond, however, as the name suggest, it is a contract based overseas. Typically established within Ireland, the Channel Islands or the isle of Mann, the offshore bond has the distinct difference of not paying tax within the wrapper. This means that all tax is deferred. The 5% annual withdrawal of capital is still permitted. Over the longer term, this means that tax which would have been due during ownership instead remains invested, producing even more growth. This ‘income rollup’ means that over the long term the returns may be higher than in an onshore bond. These are again very useful when using trusts or when individuals have significant incomes that can be reduced in the future.


For many years now HMRC have promoted investment in to smaller companies in the UK. The Enterprise Investment Scheme is the descendant of the Business Start-up Scheme, first introduced in 1981. The principal motivation of the scheme was to encourage investment in smaller companies (not listed on a stock exchange) that wanted to grow and needed investment. In return, tax breaks were offered to investors. The EIS scheme offers a 30% tax reducer on any investments, meaning for example, a £100,000 investment would allow the investor to reduce their tax bill by up to £30,000 Any growth on the investment within the EIS is tax free and there is also the ability to defer previous taxable capital gains and loss relief in the case of an investment failure. The investments need to be held for a minimum of 3 years to qualify. As most EIS investments are also in qualifying companies, the investment may qualify for Business Property Relief, allowing the investor to reduce their estate’s potential Inheritance Tax liability.

There are many EIS investment companies established now that specialise in sourcing companies that require EIS investment and structuring portfolios of EIS investments for clients. This can reduce the risk of total loss somewhat. Some will specialise in specific areas such as media, energy or infrastructure. It should be noted though that EIS schemes, by their very nature of being within small, growing companies, pose a much greater risk than traditional investments.

The SEIS scheme was introduced in 2012 and provides even greater tax relief, with a 50% tax reduction. This in only available in smaller quantities and are less widely available but are a very valuable way for businesses to raise capital.

VCTs and EISs invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.


Similar to an EIS, a Venture Capital Trust is designed for investors to obtain valuable tax reducers in return for investing in smaller companies. First introduced in 1995, they provide an additional avenue for companies to obtain investment. A key difference to the EIS is that the VCT is an investment vehicle, investing in a range of companies, rather than just one. They too provide a 30% tax reducer but are required to be held for 5 years in order to retain the tax relief.

Trust Investments

A trust in itself is not a tax wrapper as per some of the previous examples, however, holding investments via trust can provide the benefit of providing a degree of estate planning and therefore reducing potential inheritance tax. They can also provide some degree of protection from potential creditors that may wish to reduce your estate or that of your beneficiaries. There are many forms of trust although the majority used for investment or estate planning are bare (absolute) trusts or Discretionary (flexible) trusts. The tax obligations in each are different, with the most flexible trust (discretionary) having the harshest tax situation. However, with the careful use of tax wrappers such as investment bonds, tax can be deferred until personal tax allowances can be used.


Following the introduction of flexi access benefits in 2015 to pension arrangements, these are now forming an even more essential part of an individual’s investment planning. Although benefits are not available until age 55 (or 10 years before State Retirement Age), if this is not an issue, pension plans offer the ability to reclaim income tax when contributions are made, although income tax is paid on some of the benefits when withdrawn. With a careful understanding of what your marginal tax rate is likely to be in entry and exit, it is possible to make considerable tax savings. Commonly, up to 25% can be taken from a pension plan tax free although, in some cases it can be up to 100%.

Other planning opportunities lie with estate planning as many pension funds can be left to a beneficiary free of inheritance tax when paid as a lump sum before crystallisation. Alternatively, flexi access benefits can be transferred to a beneficiary on death.

The state pension provides valuable guaranteed income at a relatively low investment cost. It is always good planning to obtain state pension estimates to ensure the valuable benefits are maximised. And where relevant, consider topping up your state pension contributions as their returns are more valuable than you might think.

The value of pensions and investments and the income they produce can fall as well as rise. You may get back less than you invested.