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Investments generally
As mentioned at the beginning of this guide, we cannot give investment advice. However, what we can say is that in considering what investments to make the old adage that “the tax tail should not wag the commercial dog” should be borne in mind.
Pay the maximum into your ISAs
UK residents ages 18+ can invest up to £20,000 each and parents can fund a Junior ISA or Child Trust Fund with up to £9,000 per child - a total of £58,000 per year for a family of four.
Income and capital gains are tax free and withdrawals from ISAs do not affect tax relief.
Other ISAs include those designed to encourage the crowdfunding of small businesses, buying first homes and a general lifetime ISA of £4,000 per year. A cash-only ISA of £20,000 is also available each year.
Wasting assets are tax free
There are a number of wider classes of investment assets that have specific tax advantages and should be considered if you already have a diversified investment portfolio.
For example, motor vehicles and watches are exempt from Capital Gains Tax (CGT) so investing in classic cars or watches can yield tax free gains, so long as you are not trading.
Wine is usually regarded as a wasting asset that is tax-exempt, so again, can yield tax-free capital gains. However HMRC have now indicated that wines capable of lasting more than 50 years will be subject to CGT. Cask whiskey is also prima facie tax-free if sold at a profit, although it remains to be seen whether HMRC will take the same attitude as with fine wines.
Investment in woodlands can also be tax efficient. There is no up-front Income Tax relief for the investment but, if you realise a capital gain, it can be reinvested in woodlands and the gain rolled over until the land is sold. A gain on the land may qualify for only 10% CGT this year (14% CGT next year) if BADR is available. Income from timber sales is tax free, and the value of the investment can qualify for relief from Inheritance Tax (IHT). IHT will be nil for the first £1m and thereafter 20% as opposed to the usual 40%. If you sell the whole woodland, only the land element of any capital gain is taxable at 24%, not the increase in value of the timber.
In all cases, be aware of trading. Trading profits are always liable to Income Tax and NIC.
Bonds
5% of capital invested can be withdrawn each year tax-free for up to 20 years.
After such withdrawals reach 100% of the original capital (i.e. after 20 years if the 5% is taken each year), Income Tax is payable on further withdrawals or on surrender of the policy. Some relief may be available on these "chargeable events" because of the availability of "top-slicing"
Offshore bonds give rise to tax-free growth. They allow income and gains to accumulate tax-free until they are disposed of once the original capital investment has been repaid after 20 or more years. The excess is subject to income taxed at a maximum of 45%.
Bonds, especially offshore bonds, can form part of more complex planning, including planning for cross-border movements of the bondholder, family wealth succession planning and UK/USA tax planning.