Tax-efficient returns

Holding the right structure can pay big dividends

Few assets are inherently tax-efficient. While growth in the value of oneís principal residence is not subject to capital gains tax, a home is a home and should not necessarily be viewed as an investment. Most assets, however, come with a choice of tax-efficient returns if held through the right structure.

Cash is a ‘safe’ investment in that your capital is not at risk, although the value of cash holdings can be eroded by inflation if the rate of inflation is higher than the interest rate you are receiving, as has often been the case in recent times. You can hold cash tax-efficiently in an Individual Savings Account (ISA) or via a number of other products.

Access to a wider portfolio of holdings
Shares (basically a stake in a publicly listed company) and bonds (issued by governments or companies as a way of borrowing money) can also both be held in an ISA, as can property (usually commercial property) if it is held via a fund. The same goes for collective investments such as investment trusts, open-ended investment companies (OEICs) and exchange-traded funds (ETFs). Investment trusts usually invest in shares, with the aim of giving investors access to a wider portfolio of holdings than they could realistically achieve on their own. OEICs work on the same principle, although there is a wider choice of OEICs investing in other assets such as bonds than is the case with investment trusts.

There are also both OEICs and investment trusts that invest in a range of assets, which are known as ‘multi-asset’ funds. These may be run by a single manager, or they may themselves invest in other funds, in which case they are known as ‘multi-manager’ funds.

Greater growth potential
Exchange-traded funds usually track a particular index of shares or other assets such as commodities. They are very low-cost but because they are ‘passive’ funds that do not have a fund manager choosing the underlying investments, they do not offer the prospect of performing better than the index they track.

Shares and collective investment funds carry the risk that the value of your investment will go down as well as up; however, they also offer greater growth potential than safer investments such as cash.

Personal pensions offer a similar range of investment choices to those available in an ISA, and Self-Invested Personal Pensions (SIPPs) give the opportunity to hold business property as well, although the rules regarding these are complex and you should obtain specialist professional advice to ensure that you are not faced with unexpected costs.

A step further up the risk spectrum
High risk options such as venture and development capital investments can benefit from tax reliefs through government-backed schemes designed to boost investment in small businesses. These are a step further up the risk spectrum than shares in more established companies, as earlier-stage businesses carry a greater risk of failure.

Alternative investment
In the alternative investment arena there are some interesting tax-saving opportunities: clocks, for example, are deemed ‘wasting’ assets by HM Revenue & Customs and are therefore not subject to capital gains tax; unless you are an expert horologist, it is probably not the best idea to entrust your future financial security to a portfolio of grandfather clocks, however tax-efficient they might be. Fine wine, however, is not generally deemed a wasting asset, although there are plenty of wine investment specialists who would have you believe otherwise.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.


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