What methods of tax-efficient investing are available with alternative investments?

There are a wide variety of methods of tax-efficient investing that are available with alternative investments.

This includes ISAs such as the Innovative Finance ISA (IFISA) and Stocks and Shares ISA, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs).

 

Before we explore the methods of tax-efficient investing that are available with alternative investments, here's a reminder of what tax-efficient investing is. 

Put simply, tax-efficient investing is the process of investing into investment opportunities - often through government-approved vehicles such as pensions or the ISA - that offer investors generous tax reliefs. 

Alternative investments and tax-efficient investing

The underlying asset of an alternative investment will generally be the deciding factor over what tax benefit is available and appropriate. 

Firstly, let's consider property. One of the major forms of tax-efficient investment for investors in property is available through the IFISA.

The IFISA was introduced by the UK government in April 2016, allowing investors to hold debt-based securities - such as property bonds - and peer-to-peer loans under the tax-efficient ISA wrapper. This means that, for investors holding property in an IFISA, there is no tax to pay on any returns. 

Sticking to the topic of ISAs, Alternative Investment Market (AIM) shares can be held in a Stocks and Shares ISA - which again means investment returns are sheltered from income tax and capital gains tax.

VCTs, EIS and SEIS all offer generous tax reliefs in the hope of prompting investors to back early-stage, higher risk businesses. 

With a VCT, income tax relief is offered at a rate of 30% on investments worth up to £20,000 - and shares must be kept for up to 5 years to keep the tax relief. There is also no capital gains tax to pay on earning from the sale of VCT shares at any stage. 

EIS eligible firms offer investors a reduction in their income tax bill worth 30% of the value of the investment - up to a cap of £1 million per tax year (or £2 million if at least half is invested into ‘knowledge-intensive’ businesses). 

If an EIS investment has been held for at least two years, it’s also inheritance tax-exempt, and capital gains tax-exemption is offered on profits earned on shares held for at least three years. Loss relief is also available on EIS eligible investments if the company fails. 

SEIS eligible firms - which must be start-ups that began trading within the last two years, have a maximum of 25 staff and no-more than £20,000 of gross assets - generally have a higher risk nature than EIS eligible firms, and therefore take the EIS benefits to the next level. 

The SEIS offers investors income tax relief of 50% on investments up to £100,000 per year. In order to qualify, no-more than a 30% stake can be acquired in any business. 

 


 

MAVEN Bonds are an IFISA provider specialising in fixed term property bonds.

Against a backdrop of low interest rates and a volatile stock market, the IFISA can provide an attractive investment opportunity for experienced investors. 

With the ability to hold peer-to-peer loans and debt-based securities, IFISA investments have the potential to generate higher rates of return than more traditional investment routes for investors with a greater appetite for risk.

To find out more, download our free IFISA guide.