How to Make Tax-Efficient Investments in 2021

There are multiple options for investment in the UK, but if you’re not careful, a large chunk of your gains could be wiped out by tax.

However, the good news is that there are several ways you can legally reduce your tax liability through the use of relief and incentives. Much depends on the amount of cash you want to invest and your attitude to risk.

Here is a selection of some of the best tax-efficient investment options for 2021.

Invest in the Stock Market

You can achieve a good yield from investing in the right stocks and shares, and there are some which are tipped to perform well in 2021. They are subject to various forms of tax, including income tax, stamp duty, dividend tax and capital gains tax, so there’s a lot to consider.

This doesn’t mean that all types of stock market investments are subject to tax. The forex exchange and tax-free investments such as spread betting enable you to track market prices without having to pay income tax or capital gains tax. The forex market is very volatile and offers excellent opportunities for everything from scalping to position trading.

There are no guarantees that you won’t lose money on the stock market, so it’s essential to do your research and manage risk carefully when placing a trade.

ISAs (Individual Savings Accounts)

Most people will have heard of an ISA, a type of tax-efficient investment which was first introduced in 1999. Many different types of ISA are available, enabling you to choose the one that matches your attitude to risk.

Everyone has a tax-free allowance of £20,000 per annum to invest in an ISA. This capital is allowed to grow tax-free, and any income or interest earned is returned without deductions.

Cash ISAs have the lowest level of risk, but the returns can be nominal. At the opposite end of the spectrum are Innovative Finance ISAs (IFISA), enabling investors to participate in peer-to-peer lending while receiving their returns free of tax. IFISAs are higher risk, and they aren’t covered by the Financial Services Compensation Scheme (FSCS). However, IFISA providers must all be registered with the FCA, and there may be back-up arrangements in place to protect against problems with the specific peer-to-peer lender.

Venture Capital Schemes

There are many different types of schemes available, so you can choose the one that best matches your attitude to risk.

Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) are very similar. Both set up to encourage investors into small businesses. The latter are higher risk, and as such, benefit from 50% tax relief compared to just 30% for and EIS. 100% tax relief is available if the company goes bust, and there are no capital gains tax liabilities when you exit the investment.

An alternative to EIS and SEIS is a Venture Capital Trust (VCT). This type of managed investment fund focuses on startups and small businesses and is traded on the stock market. There is 20% tax relief available on income tax, zero capital gains tax and no liability for dividend tax.

All venture capital schemes are generally considered to be higher risk than other types of investment, but there are significant tax advantages, and the returns can be highly favorable.