Make your portfolio tax efficient

Adrian Lowcock, investment director at Architas, gives five tips on how to cut the amount of tax you pay on your investment portfolio.

Make your portfolio tax efficient

Use your ISA and SIPP allowances

ISAs and SIPPS are amongst the most tax efficient wrappers available and are supported by Government. The personal allowances of £20,000 and £40,000 per annum respectively mean that they are more than sufficient for the majority.

Use your CGT Allowance

Each year we get a personal capital gains tax allowance of £11,100 (2016-17).  Any gains made above this figure would have to be declared on your tax return and would be liable to income tax.  The CGT rates fell last April; those who pay basic-rate income tax pay CGT at 10% (down from 18%), and higher-rate taxpayers are charged CGT at 20% (down from 28%) although the previous rates still apply to sales of second homes.

Place income assets in ISA or SIPP

Selling an existing asset held outside an ISA or SIPP and buying back inside the tax wrapper can help you avoid tax on any income earned on the investment.  The process, often called a bed and ISA or bed and SIPP, involves a capital event which means any gains could be liable to Capital Gains Tax.  The advantage of placing income assets in an ISA or SIPP means that you don’t have to pay income tax on the dividends or interest you receive so you can reinvest more of the income. The effect of this may seem minor initially but will have a significant impact over time.

Manage large holdings

Many investors accumulate large holdings usually through share options from their employer.  These can build up over time and if they are not effectively managed they can result in large holdings with significant capital gains.  This means that when it comes time to sell investors face a potentially significant tax bill or are forced to sell the asset over many years to remain within the CGT allowance. Beyond this, a large holding adds a lot of risk as the portfolio is not well diversified.

Use your spouse’s allowances

If your partner isn’t working or is on a lower rate of income tax than you then it could be worth placing investments in their name. They have their own Capital Gains Tax Allowance, SIPP and ISA allowances and if they are a lower rate tax payer any income on assets will charged at a much lower rate.

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