We all work hard to put money away and therefore, it’s not uncommon to want to avoid high levels of tax on our savings and investment earnings. This blog explores the different ways in which you can ensure your savings and investments are tax efficient, as well as looking at investment products that produce a tax-free income.
What is tax efficiency?
Tax efficiency has been defined as a way to minimise tax liability in different financial decisions. Structuring an investment so that it generates less tax, as well as gifting strategies, are forms of tax efficiency. Tax is one of life’s certainties, but the amount you have to pay doesn’t need to be.
Individual Savings Account (ISA)
Our July/August newsletter discussed how an ISA is the best tax efficient method as it can hold any combination of cash savings and investments in stocks and shares.
Cash ISAs are simply a savings account, but all interest is paid tax-free. This means that your money will grow quickly, as the banks often reserve their best interest rates for cash ISA. In the current 2018/19 tax year, up to £20,000 can be contributed towards your ISA.
An ISA should become part of everyone’s investment strategy as any income that you receive and any capital gains from a rise in the value of your investments will be free from personal taxation, regardless of any other earning you may have. You will have paid tax on money that you save or invest into an ISA already.
The topic of death is not something that is brought up day-to-day, but Inheritance Tax (IHT) is something you must consider. IHT is one of the oldest forms of tax in the UK and becomes an issue when someone passes away.
For example, if you are planning to leave a large cash sum to a loved one, it is best to do this while you are alive. When you give an amount of money to a loved one, it is exempt from IHT, but only if the giver lives for another seven years.
For a more in-depth understanding on IHT, please find out more in our How To Minimise Inheritance Tax blog.
Gifting your money
Currently, you are able to gift up to £3,000 a year, plus make small unlimited gifts of £250, free from Inheritance Tax. This is the perfect way to support your loved ones and avoid IHT on your departure. Plus, you will be able to see how your financial gifts can help your loved ones first hand.
Room for rent
Renting a room in your main home allows you to earn up to £7,500 a year, tax-free. This tax efficiency method only applies to rooms in your home, not separate homes or flats. This also applies to an individual renting the room, not a couple letting jointly, as this figure would reduce to £3,750.
Our team of financial advisors are on hand to help you with your savings and investments, as well as your plans for the future. Contact us today to discuss the best forms of tax efficiency for you.