A crucial part of financial planning is ensuring that any investments are structured in the most tax-efficient way. The tax wrapper, such as pensions, Individual Savings Accounts ‘ISAs’, or other structure (i.e. where you hold your investments) can be as important, if not more important, than what you actually invest in.
What is a GIA?
A General Investment Account ‘GIA’ is simply an 'unwrapped' account where you can buy and sell investments.
There are no limits on the amount of GIAs you can have at any one time, no limits on the amount you can invest into each, and no restrictions on withdrawals.
However, there are also no fancy tax benefits, such as tax-free investment income and gains (ISAs), tax relief/government bonuses on contributions (pensions, Lifetime ISAs), or tax deferral on investment profits (investment bonds).
GIAs are ‘no frills’.
Simple but effective
Whilst investment bonds and tax-advantaged products such as Venture Capital Trusts ‘VCTs’ and Enterprise Investment Schemes ‘EISs’ have their place for certain clients and in certain scenarios, these are few and far between – they’re unsuitable for the majority of retail investors.
And whilst the tax benefits are alluring, these products are complex and also come with hefty product charges that can negate some, if not all, of those tax savings over time.
Venture Capital Trusts ‘VCTs’, Enterprise Investment Schemes ‘EISs’ and Business Relief investments are high-risk products and not suitable for the majority of retail investors.
GIAs, in contrast, are simple, low cost and are invariably more tax efficient than people realise.
This is best explained via an example.
Case study
Kate and Jack are married and in their early 40s. Kate is an additional rate taxpayer, earning £300k pa. Jack is a basic-rate taxpayer, earning £40k pa.
Each year, they ‘max out’ their pension contributions and ISA subscriptions, with little surplus income remaining. They have recently inherited £500k which they’re looking to reinvest, with the overarching goal of retiring around age 60.
- They invest all of the monies in a new GIA, structured in Jack’s sole name for tax efficiency.
- Say the investment generates a return of 5% per year, comprising interest income of 0.5%, dividend income of 1.5% and capital gains of 3%. The tax position would be as follows:
- In regards to income tax, as a basic-rate taxpayer, Jack has a £1,000 tax-free Personal Savings Allowance in respect of interest income (assuming this isn’t being used elsewhere) and a £1,000 tax-free Dividend Allowance (due to fall to £500 as of April 2024),
- In year one, the investment generates interest income of £2,500, of which £1,000 is tax-free and the balance taxed at 20% - a liability of £300. Meanwhile, dividend income is £7,500, of which £1,000 is tax-free, the balance taxed at 8.75% - a liability of £569. That implies total income tax of £869 on £10,000 investment income, an effective tax rate of 8.69%.
- In regards to capital gains tax (CGT), Jack has a £6,000 tax-free annual exempt amount (falling to £3,000 from April) - the play here would be to limit any realised gains so as not to exceed this amount.
- Assuming 3% capital growth, after year one, the portfolio would be sitting on a ‘paper profit’ of £15,000 – we would look to crystallise gains worth £6,000 to fully utilise Jack’s annual exempt amount, hence no capital gains tax due. The proceeds could then be reinvested back into a similar multi-asset fund to retain ‘skin in the game’, and potentially back into the original fund once 30 days had passed (otherwise the repurchase would be matched with the original sale).
- Note here, we could also use some of Kate’s annual exempt amount by transferring shares to her just prior to sale - there is no tax to pay on transfers between spouses, and this would potentially enable us to crystallise a further £6,000 gain without any tax due.
- What about the remaining 'unrealised' gain? These paper profits would simply roll into the next tax year and beyond – there’s no immediate tax to pay until the gain is realised (i.e. the funds sold).
- Whilst this is merely deferring a tax charge until a later year, a good strategy would be to start ‘emptying’ the GIA once the clients have retired, ideally limiting any realised gains to their remaining basic rate tax bands, such that any CGT is limited to 10% only.
In summary, by structuring the investment in the name of the lower-earning spouse, the effective income tax rate is below 10%, and capital gains tax is mostly if not fully, deferred until the point at which the funds are required. And even when those gains are crystallised, these shall be taxed at ‘just’ 10% (basic rate) or 20% (higher and additional). Furthermore, making use of both clients’ annual exempt amounts for CGT, shall gradually lift the effective acquisition cost for CGT, and reduce the overall liability.
Note, when investing, your capital is at risk. The value of your investment (and any income from them) can go down as well as up, and you may get back less than you invested, particularly where investing for a short timeframe (we normally recommend a horizon of at least 5 years). Neither simulated or actual past performance are a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate tax advice. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts and their value depends on the individual circumstances of each investor.
In other words, whilst investment profits within a GIA are liable to tax, through careful planning, this can often be limited to no more than 10%, with scope to reduce the tax burden further by crystallising gains just within the clients’ annual exempt amounts each year.
What’s more, GIAs are simple; offer full flexibility in terms of investment options, contributions and withdrawals; and can be extremely low-cost.
Please let me know if you’d like to discuss this in more detail.
Disclaimer: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
