UK Tax-efficient Investments
Tax efficient investment routes for higher rate taxpayers
How to choose one:
⇥Enterprise Investment Scheme (EIS)
⇥Venture Capital Trusts (VCTs)
⇥Social Investment Tax Relief (SITR)
⇥Self-Invested Personal Pensions (SIPPs)
What are tax-efficient investments?
Tax-efficient investments give investors tax relief on investments in qualifying companies or investment vehicles. Many UK government-approved schemes offer investors tax relief. These reliefs range from capital gains tax (CGT) to loss relief and inheritance tax relief.
As with all investments, there are trade-offs when weighing up the pros and cons of each. Two rules to keep in mind when considering these, or any type of investment:
✅First, if it sounds too good to be true, it probably is. We’ll only be looking at government-approved schemes in our review below.
✅Second, the more tax relief on offer, the riskier the investment class is likely to be. We’ll get into this later when we talk about the alternative investments that offer tax relief.
Below we’ll take you through the HMRC-approved tax-efficient vehicles and the various reliefs they offer. While you can’t avoid paying tax entirely, you can reduce the amount you pay while diversifying your portfolio and having a positive impact too.
VCT | ISA | Pension | EIS | SEIS | |
| Income Tax Relief | 30% | Nil | Up to 45% | 30% | 50% |
| Capital Gains Deferral | Nil | Nil | Nil | Up to 28% (A) | |
| Capital Gains Reinvestment Relief | Nil | Nil | Nil | Effective relief up to 14% (B) | |
| IHT Relief | No | No (C) | Yes (D) | Yes after 2 years | Yes after 2 years |
| Tax Free Exit | Yes | Yes | Yes/No | Yes/No (E) | Yes after 3 years |
| Tax Free Dividends | Yes (F) | Yes | N/A | No (F) | No (F) |
| Limits | £200,000 | £20,000 | £40,000 (carry forward may also be available) (G) | £1M (H) | £200,000 (I) |
| Min Holding Period | 5 years | None | To age 55+ | 2 years for IHT 3 years for EIS | 2 years for IHT 3 years for SEIS |
(A) Gains arising before 6 April 2021 to higher rate UK tax payers are chargeable at 28%. From 6 April 2021 the rate is generally 20% (but remains at 28% for certain assets.) The relief is a deferral only, and not an exemption and the deferred gain will crystallise on sale of the EIS shares.
(B) SEIS reinvestment relief exempts half of the gain reinvested up to the SEIS maximum investment of £100k ie for a gain of £100k reinvested in an SEIS investment, £50k of the reinvested gain is exempt.
(C) Some shares in AIM listed companies held in an ISA and held for at least two years may be eligible for IHT relief. All shares held in an ISA are exempt from CGT.
(D) In certain circumstances. Specific IHT advice is required
(E) There is no tax free exit for shares for which EIS deferral relief only was claimed.
(F) With effect from 6 April 2016 the 10% tax credit on dividends has been abolished and replaced with an annual dividend allowance (the dividend nil rate (‘DNR)). The DNR charges income tax at 0% on the first £2,000 of an individual’s dividend income which would be chargeable to tax but for the DNR. Chargeable dividend income above the DNR is chargeable to tax at basic, upper or higher rate dependent upon the tax rate which applies to the individual shareholder.
(G) Relief for pension contributions is complex and separate advice should be taken.
- In 2020/2021 those with annual income (including pension) over £200,000 will have their annual allowance reduced by £1 to a minimum of £10,000 for every £2 over £200,000 for individuals with annual income excluding pension below £200,000 there will be no reduction
- Within the Annual Allowance, member contributions benefit from tax relief at the individual’s marginal rate of tax, i.e. up to 45%
- Within the Annual Allowance, relievable member contributions are limited to 100% of employment earnings.
- The reduction in the Annual Allowance is, however, accompanied by a “Carry Forward” facility, allowing pension scheme members (if a member of a pension scheme at some time during the earlier tax years) to Carry Forward the difference between £40k from the previous 3 tax years and the lesser level of total contributions made in the previous three tax years.
(H) Up to £1M of EIS investment may be carried back to the previous tax year if the limit for that year was not fully utilised.
(I) Up to £200k of SEIS investment may be carried back to the previous tax year if the limit for the year was not fully utilised.