With interest rates at record lows and appetite for risk diminished, it makes sense to seek out tax efficient homes for your hard-earned cash. Why share returns with the tax man if you don’t have to?
The premise that cash is king has lost much of its credence over the past 5 to 10 years because returns on bank savings have generally been under 1%. This is below inflation so the buying power of your money actually diminishes over time. Even the best known banks are no longer as financially solid as they used to be, so the small interest rate is little reward for placing money with a bank who may need a Government bailout.
This is why premium bonds have increased in popularity so much during this period. Your capital is safe as you’re essentially lending money to the UK Government. Each month you’re then entered into a prize draw to win one of millions of prizes ranging from £25 to £1million. The chances of winning (number and size of prizes available each month) is based on underlying interest rates. So right now, average prizes over a year would equate to around 1%. Not great, but you have the comfort that your capital is safe and there’s the chance of higher wins. Plus any returns are free from tax, unlike your bank savings.
Many people get confused with Individual Savings Accounts (ISA). Essentially, an ISA is simply a tax efficient wrapper for certain investments. The two main types of investments which are bought within an ISA are cash savings and equity funds. So cash savings with a bank ISA would still offer very low returns but those returns aren’t taxed at least. For those with more risk appetite, equity ISAs offer the chance for increased returns. These investments are linked to the fund of your choice and returns based on the performance of the underlying shares. It makes sense, that if you’re interested in buying into a European equity fund for example, that you do this within an ISA rather than on a standalone basis. Then all dividends and increases in value are free from tax. Obviously, there’s also the risk that the value diminishes, especially as we’re in such unstable economic times. The main restriction of an ISA is the annual limit which currently stands at £20,000. Anything you wish to save above this amount, needs to be invested outside of your ISA
Tax free gold
The asset class growing in popularity the most is tax free gold. Certainly, those who are concerned about the effects of Brexit or how the US election result may affect their family’s wealth, are turning to gold as the world’s safe haven asset. Gold tends to act as a hedge in times of uncertainty, with its value generally rising while other assets fall.
The real bonus comes if you know which type of gold to buy as it can be completely tax free. All investment grade gold is VAT-exempt. This needs to be 22 carats or higher, in the form of a bar or coin. Even better, certain coins qualify as legal tender in the UK, so are free from Capital Gains Tax (CGT) too. This way your gold can grow in value and no profits will be taxed at all. Like an ISA, it acts as a tax free store of wealth, but there’s no annual limit.
If you want to buy gold but are unsure which types to buy or how, then seeking the guidance of a reputable gold dealer will help you obtain the best gold at the lowest prices.
Whichever combination of investments you choose, ensuring you select tax efficient options first will at least mean you maximise your returns.