Isa full? Other ways to invest your cash – tax-free
Your £20,000 annual Isa limit isn’t the only way to save money without handing it to the taxman. Sam Benstead looks at the other tax-free allowances and investments that grow your cash
Isas are brilliant in many ways, allowing savers to reap the profits of their investments without paying a penny of tax on dividends, income or capital gains. There is one problem though: you can only put in £20,000 a year.
If you have already maxed out your Isa allowance for this tax year, however, there are still a number of other ways to invest your money tax-free.
Ben Yearsley, of Shore Financial Planning, said investors should first check whether they have used up other tax-free allowances. If you are comfortable locking up your cash until retirement, your pension allows you to put away £40,000 of pre-tax income a year, including a topup from the Government based on your income tax band. However, only 25pc of this pot is tax-free on withdrawal.
There are also a number of tax breaks that allow savers to take income without handing any of it to HM Revenue & Customs. The capital gains tax (CGT) allowance means you can bank £12,000 of investment profits tax-free each year.
Investors can also receive £2,000 in dividend income a year before incurring a tax bill. Christine Ross, of Handelsbanken
Wealth Management, said: “This simple but overlooked rule effectively extends your Isa allowance by 10pc.”
Once you have used up these tax breaks, the next port of call is your family. If you have a non-earning spouse, it is possible to transfer assets into their name to make the most of their allowances as well.
Children also get their own annual investment allowances, so Mr Yearsley recommends making use of the Junior Isa allowance of £4,260 and their pension allowance of £2,880 before April 5.
If these options are exhausted and you have a higher risk appetite, you could consider a Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). These provide generous tax breaks to incentivise investment in smaller businesses.
You can put up to £200,000 a year into VCTS, which must be held for five years. Newly issued shares benefit from 30pc income tax relief and tax-free dividends and growth. Any returns are typically paid as taxfree dividends.
EIS investments, with an annual limit of £1m, also allow you to claim 30pc income tax relief and are exempt from income, CGT and inheritance tax. These are riskier than VCTS and pick high-growth companies that have the potential to disrupt established business areas. They could pay dividends but this is highly unusual, said Alex Davies of Wealth Club, a specialist tax-efficient investing firm.
Even riskier is investing via SEIS, which encourages investment in new companies with no more than 25 employees and assets under £200,000. The annual investment limit is £100,000. They offer 50pc tax relief and, like an EIS, must be held for three years.
Mr Yearsley recommended Pembroke VCT, which is 60pc full. It backs small, growing companies in health and fitness, hospitality, media and technology. It has invested in Sourced Market, which has a number of farmers’ market-style cafés around London, and Mexican food chain Chilango.
Mr Davies preferred Octopus Titan for technology investments. It is the largest VCT on the market and boasts former successes such as property website Zoopla, snack subscription Graze and holiday booker Secret Escapes. It is less than half full, with £93m of capacity remaining. “If a VCT is going to find the next Facebook, it’s this one,” he said.
He also recommended Proven, the longest-running VCT available. It picks highgrowth companies and has doubled investors’ money over the past 10 years. For EIS funds, Mr Yearsley suggested Earthworm EIS. It specialises in positive social or environmental investments across food, energy and waste, and aims to double investors’ money over six years. It recently invested in Weedingtech, which treats weeds and moss using environmentally friendly hot foam, removing the need for harmful herbicides.
Mr Davies chose Fuel Ventures EIS for adventurous investors. It is run by entrepreneur-turned-investor Mark Pearson who was a self-made multi-millionaire by 30. The fund has backed Tutor House, which connects students and vetted tutors, and Olivia’s, a marketplace for premium furniture.
The Oxford Technology SEIS invests in technology start-ups in Oxford. Run by Lucius Cary, it looks for companies that can deliver 10 to 20 times returns over five to 12 years. It is raising £15m and has a minimum investment of £15,000.