Tips to make your investment portfolio tax efficient

This tax year’s individual savings account (ISA) deadline is fast approaching.

Don’t leave ISA contributions until the last minute.

The annual ISA allowance is £15,240 and runs from April to April the following year. To make the most of your allowance plan ahead.

Ben Yearsley, investment director at Wealth Club says: “With the end of the tax year fast approaching, there isn’t much time to organise your financial affairs. Every year many investors and high earners lose out on valuable tax efficient allowances by leaving things too late.”

Yearsley adds: “£15,240 is a generous allowance that can give tax free growth and income free from any further tax – the ISA could even be IHT free too if invested in an AIM portfolio. On a typical dividend yield of 3.5%, £533 of income could be generated each tax year. From the 2017/18 tax year the allowance increases to £20,000.”

Below are key things to consider when reviewing your ISA investment portfolios.

Asset allocation

Sam Coppin, director of advised investments at Saga Investment Services highlights asset allocation is important as people start to accumulate investments. This could be bonds, property or more esoteric assets such as commodities such as gold, oil, and hedge funds.

Coppin explains: “This mix is called asset allocation and academic research suggests that it is responsible for 90% of the differences in investment returns. So it’s worth putting in some effort to get this right.”

Place income assets in ISA or SIPP

Adrian Lowcock, investment director at Architas says selling an existing asset held outside an ISA or SIPP and buying back inside the tax wrapper can help you avoid tax on any income earned on the investment.

Lowcock explains: “The process, often called a bed and ISA or bed and SIPP, involves a capital event which means any gains could be liable to Capital Gains Tax (CGT). “

An advantage of placing income assets in an ISA or SIPP means that you don’t have to pay income tax on the dividends or interest you receive so you can reinvest more of the income.

Use your spouse’s allowances

Another tip if your partner isn’t working or is on a lower rate of income tax than you then it could be worth placing investments in their name.

Lowcock explains: “They [your partner will] have their own Capital Gains Tax Allowance, SIPP and ISA allowances and if they are a lower rate tax payer any income on assets will charged at a much lower rate.”

Invest internationally

Don’t restrict your investment to the UK market. Why not invest internationally and gain exposure to investment funds covering overseas markets?

Coppin explains: “UK stock exchange listed companies represent around 10% of global stock markets, so it simply doesn’t make sense to restrict a choice of investments to the UK market alone.”

Keep costs under control

Coppin highlights costs have a huge impact on future investment values. He says: “They are also one of the few factors in investment that can be predicted with some certainty. A 1% difference in annual charges on a £100,000 portfolio could equate to a £60,000 difference in returns over 20 years (based on an 8% annual return*).”

Written by London-based journalist Tanzeel Akhtar. Her work has been published in the Wall Street Journal, FT Alphaville, CNBC, Citywire, Euromoney, Interactive Investor.

Disclaimer: The content on this page does not constitute financial advice and is provided for general information purposes only. Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment.