Plenty of people leave tax planning to the last minute. But if you’re not like plenty of people, and you instead prefer to plan ahead, there are several benefits to sorting your tax out early.
a person who starts using a product or technology as soon as it becomes available.
If you’re an entrepreneur, early adopters are probably going to play a crucial role in the growth of your business.
In fact, you’re probably an early adopter yourself. Or, according to the theory behind early adoption, an innovator. Or both.
The point is you do things early, you do them quickly and you do them efficiently.
And, if you’ll indulge me over the next few minutes, I’m going to explain why being an early adopter in tax planning might benefit your wealth and align with the way you do things.
The great author Charles Dickens wasn’t a fan of leaving things to the last minute. “Never do tomorrow what you can do today. Procrastination is the thief of time,” David Copperfield is advised as he makes his way through life.
But procrastination can also be a thief of wealth.
For example, if you start planning your tax arrangements from the start of the tax year (6 April onwards) you can take two big investment opportunities.
The first is simply more time in the market. Stock markets go up about 70% of the time. Procrastinators may well miss a year’s worth of those frequent upward days. Even missing just the ten best days of market performance has the potential to halve your overall return, according to recent analysis.
But what about that 30% of the time when markets go down?
Well, the second opportunity is to drip feed your money in regularly. This is called ‘pound cost averaging’ and it means, when markets do go down, you are pretty much automatically buying a dip. It’s a disciplined approach that can smooth out some of the, let’s face it, daunting rises and falls in stock markets.
Wrapping your tax
If you do decide to arrange tax affairs early, then the first thing is usually making use of tax efficient savings wrappers.
We use the term wrapper because you’re taking an investment that may otherwise attract tax, and wrapping it to insulate it from Income or Capital Gains Tax.
In practical terms:
- Have a think about making the most of you and your family’s Individual Savings Account (ISA) allowances: this is £20,000 for adults and £9,000 for under 18s
- Consider moving any unwrapped investments into an ISA: you can do this through a pair of concurrent transactions in what experts call a ‘bed and ISA’
Clearly, ISAs are a way of making an investment outcome more efficient. Deciding whether to use one should always come after you’ve already made the decision to invest. Though, it is important to remember that efficient does not equal bulletproof.
For example, we sometimes have to advise clients they might need to take a tax hit. Over the years we’ve worked with plenty of people who have insulated their wealth using every available and appropriate wrapper – but there’s still some unwrapped capital left over.
On these occasions, what we do is help people take the least-bad option. For example, paying Capital Gains Tax (CGT) is less of a hit than Income Tax: 20% versus 40%, at a simplified level.
But for most clients, there’s almost always something that can be done.
Moreover, making these (sometimes difficult) decisions as early as possible in the year can reduce the chances of a nasty surprise.
VCTs and acronyms
Further wrappers are also available.
Two of them might be appropriate for some early adopters as they consider their tax planning.
- Venture Capital Trusts (VCTs) offer up to 30% income tax relief and dividends from the underlying investments are tax free. They allow you to invest up to £200,000 in a tax year and receive tax relief of up to £60,000. But you must stay invested for five years. Plenty of UK companies have benefitted from the injection of capital provided by VCT investment, with one example being Pure Pet Food.
- Enterprise investment schemes (EIS) also offer up to 30% income tax relief; you steer clear of CGT when you exit, and you can also defer any previous capital gains. But, you must hold the investment for three years. Loch Fyne Oysters is an example of a company that benefitted from this scheme.
However, these schemes require investment in early-stage companies that may not go the distance. And they can be extremely complex.
For example, in the case of EISs, the investments you make must be in UK companies not listed on a stock exchange. If a company’s situation changes, they may no longer qualify for EIS investments – and you lose your benefits.
A new tax rule
One more reason to think about getting ahead and starting early is a recent change to CGT allowances.
For years, you could receive £12,300 in gains before CGT kicked in.
As of 6 April 2023, that drops down to £6,000. And then from 6 April 2024 it halves again, to £3,000.
If you must realise a capital gain, and possibly trigger CGT, and you can’t do it in what’s left of the current tax year, then better to do it next year.
And if you’re going to do it next year, it is far better to do it early to ensure your arrangements are set for the rest of the year – and that you reach tax year 2023/24 in good shape.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.