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Tax efficient ISA / SIPP investments in the UK

Can’t fit all your investments into your ISA and SIPP tax shelters? Then you’re going to have to make some choices. Happily, the pecking order for maximum tax efficiency is clear cut.

In order of most important-to-shelter to least:

  • Offshore funds without reporting fund status
  • Bond funds / Fixed interest ITs
  • REITs
  • Individual bonds
  • Income producing equities
  • Foreign equities (arguable)

Tax efficient investing for your ISA or SIPP

To see why this sequence is likely to suit your circumstances, let’s just quickly tee up the relevant tax rates from April 2016:

 2016/17 Income tax Dividend tax Capital Gains Tax
Tax-free allowance £11,000 £5,000 £11,100
Basic rate taxpayer 20% 7.5% 18%
Higher rate taxpayer 40% 32.5% 28%
Additional rate taxpayer 45% 38.1% 28%

At a glance we can see that income tax is the nastiest while capital gains tax (CGT) is generally the most benign due to the high personal allowance (you can use your spouse’s too) and the ability to offset gains against losses.

Before we get into the guts of it, I’ve got to dish up some caveat pie:

  • This article is written for the 2016/17 tax year, so I’ve used the new dividend income tax rates.
  • Information on the CGT rate for 2016/17 is currently unavailable.
  • Interest is taxed at your usual income tax rate and basic rate payers will have a £1,000 personal savings allowance from April, reduced to £500 for higher rate payers and nil pounds beyond that.
  • If your interest or dividend income or capital gains pushes you into a higher tax band then you will pay a higher rate of tax on the protruding part.
  • I’m restricting this article to mainstream investments – no kinky stuff.
  • If you’d like a quick refresher on the tax deflecting powers of ISAs and SIPPs, well, just click on those links.
  • And if you’re not sure which is best for saving then try our take on the old ISA vs SIPP debate.

Non-reporting funds

Offshore funds that do not have reporting fund status are taxed on capital gains at income tax rates. As you can see in the table above that’s a hefty tax smackdown. Worse still, your capital gains allowance and offsetting losses are knocked out of your hands by HMRC like the school bully taking your lollipop.

If your offshore fund or ETP doesn’t trumpet its reporting status on its factsheet then it probably falls foul and should be stashed in your ISA or SIPP.

It’s worth double-checking HMRC’s list of reporting funds. Around 25% of offshore funds / ETPs available to UK investors don’t qualify.

It is possible for a reporting fund to lose its special status, therefore you could put all offshore investments in tax shelters, if you like to head off unlikely but plausible worst case scenarios.

Bond funds

Bond funds / ETFs are next into the tax bunker because interest payments are taxed at income tax rates rather than as dividends. Any vehicle that has over 60% of its assets in fixed income or cash at any point in its accounting year falls into this category.

Real Estate Investment Trusts (REITs)

REITs pay some of their distributions as Property Income Distributions (PIDs). PIDs are taxed at income tax rates not as dividends. Get ‘em under cover.

Individual bonds

Individual bonds are liable for income tax on interest just like bond funds. The only reason that bonds are slightly further down the list is because individual gilts and qualifying corporate bonds do not pay capital gains tax.

Income producing equities

The dividend tax situation has suddenly got a lot worse for UK investors, so high-yielding shares and funds should duck under your tax testudo next.

By all means prioritise protection for your growth shares if you think CGT is the bigger problem, but bear in mind you can defuse capital gains every year and you can always defer a sale.

Foreign equities

It isn’t necessarily a priority to get overseas funds and equities sheltered but there’s a tax-saving wrinkle here that only works with SIPPs. The issue is withholding tax which is levied by foreign tax services on dividends and interest you repatriate from abroad.

Some withholding tax will be refunded as long as you fill in the right forms. For example a 30% tax chomp on distributions from US equities becomes a mere 15%.

Foreign investments in SIPPs can have all withholding tax refunded but only if your broker is on the ball. You’d need to check. ISAs don’t share this feature.

If you hold foreign equities outside of a tax shelter then you can use whatever withholding tax you have paid to reduce your UK dividend bill.

So in the case of US equities, a basic rate taxpayer could use the 15% they’ve paid in the US to reduce their 7.5% HMRC liability to zero.

In other words, only higher rate / additional rate taxpayers should consider sheltering US equities in ISAs. Everyone can benefit from the SIPP trick, though.

Bow-wowing out

It only remains to say that this is generalised guidance and tax is a byzantine affair. Please check your personal circumstances.

Tax efficiency is important but whatever happens don’t let the tax tail wag your investment dog.

Take it steady,

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The Advantages of Investing In Shares

Each individual living in this world has his own goals and ambitions and during the whole life he tries to make them come true. But for being able to achieve our desired goals one of the most important things that we need to have is money. There are people who monthly put some part of their salary aside or keep piggy banks trying to save some money for the realization of their desires while there is a certain category of people who invest their money in a specific field.

There is such a widely spread opinion that only rich people can enter the boundless world of investments and double their fortune. However that’s not true, as anyone can afford himself to take part in investments. Nowadays, there are many types of investments and each one can easily choose the best variant for him to invest his money.

Today, one of the most common and popular types of investment are considered to be shares. As it is known shares are the small part of each company and if someone owns a share than he owns a little part of the company and becomes entitled to part of its profits. But before doing any investment it is quite vital to do good research and find out everything about the company you are going to invest in. Today, there is a wide choice of well-known companies, where you can invest your money such as Apple, Microsoft, Facebook, McDonald’s, Samsung, Pepsi, etc.

Like any investment, investing in shares also has its advantages and disadvantages. Now, let us see what the main advantages of investing in shares are.

  • You become a shareholder

Buying a share, you automatically become a part owner of the company, which in its turn means that you get the right to obtain dividend, which is the part of the profit made by the company at the end of each year. It should be pointed out that the more shares you own the more money you will receive at the end of the year.

  • Your capital increases rapidly

One of the main advantages of investing in shares is of course the income you receive. It goes without saying that the price of shares is tend to move up and down which can cause you either get or lose your money. But if  you have chosen the company which is very popular, which has a great demand and in case everything goes right with your investment than be sure to expect high returns.

  • Shares are easy to sell and buy

In comparison with other types of investment, shares are quite easy to buy or sell. You can buy a share at a lower price and when the price of the share increases sell it at a higher price. Today, everyone wants to earn money and become a part of the famous companies, so it won’t present any difficulty to sell or buy a share.

By the way, as the world keeps on developing rapidly, each day there happens thousands of innovations and today one of such innovations are CFDs. A CFD (Contract for Difference) is an agreement between two parties, usually known as a buyer and a seller, on the difference of the prices various underlying assets (share, index, commodity, etc.). In other words, the creation of CFDs has made our lives easier, as nowadays you don’t have to waste much time and effort, collect various documents for buying a share of the company. With CFDs it has become much easier and more comfortable. So, without really possessing a share or any other asset, you can also gain much money.

Incidentally, for being able to buy a CFD, you will need the help of a brokerage company. Today, there is a wide range of brokers and each one can easily find the one which best corresponds to his needs. One of such brokers is IFC Markets, a leading CFD broker, which offers a wide range of stock CFDs (German stock, Chinese stock, US stock, Japanese stock and many more).

To sum up with, it should be admitted that before doing any investment, one should think carefully and should be ready to face not only success but also failure.