Maximising Returns: 5 Tax-Efficient Investment Options for Investors

Minimising tax liabilities is a cornerstone of personal finance strategies for investors and their advisors, with tax-efficient investment helping to preserve hard-earned income and maximise investment gains. 

Whilst ISAs and pensions are perhaps more widely known, many investors are increasingly aware of the attractions of VCTs, where they play a key role in the government’s broader strategy of encouraging savings among investors, as well as contributing to increased economic growth, job creation and innovation.

Here we feature some of the principal avenues for UK investors to invest in a tax-efficient manner.

1. Individual Savings Accounts (ISAs)

Offering ease-of-access and flexibility of payment, ISAs are perhaps the best known tax-efficient investment option available to UK investors. Whilst relatively limited in terms of annual investment options, with a maximum allowance of £20,000 per tax year, ISAs enable investors to hold or cash stocks and shares and benefit from paying no income or capital gains tax on their investments. This can suit a range of investor risk profiles and help towards financial goals, including building retirement savings alongside a pension, university fees, a house deposit or the cost of a wedding.

There are several types of ISAs available, designed to allow exposure to different types of underlying assets to match varying risk appetites and financial goals, including Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs and Lifetime ISAs. Although the yearly allowance has steadily increased to £20,000, it’s worth noting that this allowance is a ‘use-it-or-lose-it’ tax break which can’t be carried over into another tax year if unused.

Unlike pensions, which for most recipients are subject to income tax on taking lump sum benefits, withdrawals of capital from ISAs are generally tax-free. This means that investors can access their savings at any time without incurring any income tax. Some additional rules apply for the Lifetime ISA, which is specifically intended to help a saver buy their first home or save for later life and has benefitted from government added bonuses each year, so a saver is subject to charges for withdrawing money for reasons that fall outside of that intended purpose.

2. Pensions

Pensions are one of the most tax-efficient investment options available, offering tax benefits to incentivise individuals to make regular savings for retirement, primarily through the availability of generous tax relief on their contributions. From a government policy perspective this can significantly reduce future state liabilities and offset the loss of immediate tax revenues.

The primary tax advantage for making pension contributions is that they benefit from tax relief at the investor's marginal rate, ranging from 20% for basic-rate taxpayers (meaning that every £1 invested costs just 80p) to 40% or 45% for a higher rate or additional rate taxpayer (tax rates vary slightly in Scotland). Investments within a pension also grow tax-free and have no capital gains tax liability.         

Whilst the abolition of the standard lifetime allowance by the previous government has been welcomed by pensions investors as a way of easing the restrictions that deterred some high earners, the continuing annual allowance means that UK taxpayers are restricted to receiving relief on a maximum of £60,000 per year or 100% of their annual earnings (whichever is lower). That said, pensions do offer flexibility for those with variable earnings or ability to afford pension contributions, by allowing the ‘carry forward’ of any unused annual allowance from the previous three tax years for use in the current tax year. The waters have been muddied to some extent for pensions investors following changes announced in the 2024 Autum Statement, proposing that from 2027 unused pension funds and death benefits will be included within the value of a person's estate for Inheritance Tax purposes, which may lead investors with traditional pensions to consider other tax-efficient options as part of their wider portfolio planning.

3. Venture Capital Trusts (VCTs)

A Venture Capital Trusts (VCTs) were introduced by the government in 1995, intended to attract capital from private investors to help fuel the growth of smaller British companies that would otherwise struggle to access the finance they need to grow. A VCT is similar in structure to an investment trust as it is listed on the London Stock Exchange and managed by a board of directors. A shareholder in a VCT owns shares in the trust, as opposed to a direct stake in the underlying companies. A VCT is designed to provide shareholders with returns by investing in a diverse portfolio of small private or AIM-listed companies selected by a specialist fund manager, using funds raised from individual investors through new share issues.

VCTs focus on adding value to their portfolio companies, through a combination of growth funding alongside SME experience and strategic support provided by the VCT manager, and aiming for a profitable sale of each asset to provide further funds for paying Shareholder dividends of investment in further assets.

Notably, a large and well established VCT portfolio allows investors to benefit from significant diversification through exposure to a range of industries and the UK regions, in order to spread investment risk and maximise potential returns. Some long standing VCTs, such as Maven’s, provide access to more than 100 carefully vetted private or AIM-listed UK businesses.

In total, VCTs have now deployed over £12 billion in investments into thousands of emerging UK companies, establishing a strong track record in supporting innovation, job creation and economic development across the UK regions.

Reflecting the risks associated with investing in smaller businesses, VCTs offer generous tax incentives to private investors, intended to attract valuable capital to back this vital sector. Investors can benefit from a number of tax benefits on investments of up to £200,000 per tax year in new shares: up to 30% initial tax relief on investments in newly issued VCT shares, provided that the investor holds the shares for a minimum of five years after issue; tax-free dividends, allowing investors to receive an income without the need to report them on their tax return; and Capital Gains Tax (CGT) exemption on any profits realised from the sale of VCT shares.

4. Enterprise Investment Scheme (EIS)

EIS is another government initiative designed to encourage investment into early-stage UK companies with high growth potential. Unlike VCTs, where an investor owns shares in the listed investment vehicle rather than the underlying portfolio businesses, EIS investors get direct ownership in the shares of each early-stage company. Investment can be directly into the company, or through an EIS fund, which will invest on behalf of the individual in several qualifying companies. 

EIS investors can benefit from income tax relief of up to 30% on investments of up to £1 million per tax year (or £2 million for a knowledge intensive company), provided that shares are held for a minimum of three years and that the company remains EIS qualifying for that period. Additionally, any gains made on the disposal of EIS shares are exempt from capital gains tax after three years from investment, while the EIS investment also benefits from exemption from inheritance tax provided the investment has been held for at least two years as at the time of death.

EIS also has a couple of enhanced features providing both a safety net for potential losses and a tax-efficient way to reinvest gains. Firstly, Loss Relief enables investors to offset EIS shares sold at a loss against their capital gains or income tax bill in the year of disposal, helping to mitigate the financial impact of a poorly performing investment. Secondly, Capital Gains Deferral enables investors to defer gains from the disposal of an asset if they purchase EIS shares either within three years after the disposal or up to one year beforehand.

5. Seed Enterprise Investment Scheme (SEIS)

Unlike its sister programme EIS, and VCTs, which support slightly more established private and AIM listed companies (i.e. those with up to seven years trading history and up to 250 employees), SEIS backs startups and very early stage businesses which have maximum gross assets of £200,000 immediately before investment and fewer than 25 employees at date of investment. 

While SEIS investments carry a higher risk due to the embryonic stage of the businesses involved, this is reflected in more generous tax incentives available for SEIS-qualifying companies, including income tax relief of up to 50% on investments of up to £100,000 per tax year. Tax relief can also be carried back to the previous tax year, as long as the maximum investment under SEIS for that year has not already been made. 

SEIS offers several other tax benefits to investors. Firstly, there is no CGT on gains, provided the shares are held for at least three years, and 50% Capital Gains Tax relief can be claimed if the gains from an investment in a non-SEIS company are reinvested into an SEIS-eligible company. There is also no Inheritance Tax on SEIS shares as long as they are held for at least two years and, if the business does not perform well and the SEIS shares are sold at a loss, investors can claim SEIS loss relief.

Choice of tax efficient investment

The investment options outlined above offer attractive tax benefits, suited to UK investors with a range of investment objectives and risk profiles. Ahead of the tax year-end, UK investors have the option to not only grow their wealth and minimise tax but also to contribute to the growth of innovative businesses and the broader economy if investing in VCT/EIS. 

However, some tax-efficient investments aren’t suitable for everyone, where the returns potential, benefits and tax treatment depend on the individual’s circumstances and risk profile. We always recommend that you seek financial advice if you have any doubt about which investments are most suitable for you.

The information in this article is not exhaustive, is based on Maven’s understanding of current tax rules and product features and is not a recommendation of any specific investment. Investors are encouraged to seek advice from an authorised adviser if any doubt about the suitability of an investment to their own financial circumstances or tax position. Maven Capital Partners cannot provide taxation, investment, or financial advice.