Tax: A Key Driver to Investment

In my experience, tax is a key component of any investment decision, writes Andrew Rand. With tax rates as high as 45% and investment returns struggling in the current economy, any saving of tax is particularly welcome. Premium bonds and returns on investment bonds are often popular choices as both the prizes on the former and the 5% drawdown on the latter are tax free. For those with an appetite for risk, belonging to a horse racing syndicate or spread betting can offer tax free returns.

However, it is not just investment returns that motivate individuals – it is also very often the need to save on a potential 40% inheritance tax liability that directs investment into assets which are exempt from this liability. These can include investment into AIM shares and into commercial woodland.

Many investors are drawn to investing into companies that qualify under the Enterprise Investment Scheme (EIS) and into Venture Capital Trusts (VCTs) which offer 30% tax relief on the investment and, subject to certain qualifying conditions, are capital gains tax free on sale. As with any investment it is essential to always understand the risk and the returns involved.

Pension contributions continue to offer an excellent tax incentive, as tax relief at the highest rate is given on contributions. The gains made by the pension fund are tax free and 25% of the fund can be received as a tax free lump sum. Since ‘B Day’ some of the requirements to buy an annuity have been lifted and in some cases part of the fund can be returned to the investor subject to a tax charge.

Of course for many, the biggest investment they ever make in their lives is into their business, where the return from that investment – the profit – is very much affected by tax. The careful investment into plant and machinery, legal structure of the business and decisions on pension contributions, can all impact the tax paid and ultimately the amount of money you have.

Clearly, professional advice should be taken before any investment decision is made.

If you have any further questions regarding this article please feel free to contact us.

As featured in Cambridge News Wealth Management supplement, 23 April 2013