Ensure you Stay tax efficient with your Investment Assets

16 December 2020

With rumored increases to the Capital Gains Tax (CGT) rates in April 2021, many people, rightly so, are considering the ownership structure of their investment assets.

Ensuring tax efficiency over the next few months is vital, so here’s a few areas to consider:

  • Shares.
  • Bonds.
  • Loans.
  • Property.
  • Cash investments.

Most tax reliefs and incentives are intended by the government to encourage entrepreneurship and investment in trading companies, which are more likely to be employers. Whilst the holding of investment assets may have many benefits to the owner, without any forward planning, tax efficiency’s not likely to be one of them.

Historically, investments have typically been held in either personal names or in a trust. ‘Family Investment Companies’ are now ‘in vogue’ and have many attractive attributes. It’s important then, to consider the nature of the investments and the long term goals of the individual and family in order to determine the best solution, which may well be a combination of investment holding vehicles.


A trust’s a way to pass wealth on to the next generation whilst retaining control and an income generation. Depending on the type of trust, it can provide complete flexibility in terms of who benefits from the trust, when and by how much, so they’re often used by parents or grandparents looking to pass wealth to the next generation.

When an individual transfers an asset into a trust, an Inheritance Tax (IHT) event called a Chargeable Lifetime Transfer occurs. Every individual has a nil rate band for IHT purposes of £325,000. There’s an additional £175,000 available for use against an individual’s main residence on death. The nil rate band replenishes every 7 years. If the value of an asset transferred into a trust exceeds the nil rate band, then IHT of 20% of the value of the asset will become due. CGT’s also an important consideration, but there’s often a relief available to defer any CGT to the trustees of the trust.

Importantly, with a trust, the individual transferring an investment asset into a trust (called the ‘Settlor’) shouldn’t be a beneficiary of any income or gains subsequently made by the trust assets, as this can give rise to undesirable tax issues. Depending on the type of trust and the nature of the income, a trust can be subject to income tax at a rate of 45%. This isn’t as onerous as it sounds, because the beneficiaries can claim a credit against the trust tax suffered, but it’s not always straightforward to deal with in practice. As the value of investment assets (hopefully) grows, so does the value of the trust property. There’s a specific trust tax regime which assesses any value of trust property every 10 years and seeks to tax that value.

Investment Company

Our Tax team have highlighted the implications of using a Family Investment Company as a means to creating a tax efficient succession structure, click here to read more. The UK has a competitive corporation tax rate of just 19%, so it makes sense to use this to your advantage.

How this typically works is that parents or grandparents would transfer their investment assets into a company in exchange for a loan. Unlike with a trust, because the investment assets are exchanged for a loan, no value’s passed into the company and there’s no event for IHT purposes.

The structure of an investment company can be tailored to the investment strategy and long term objectives of the individuals involved. Unlike a trust, it’s not easy to change the beneficial owners of the investment assets or to change the split of income paid out to each, which in this sense makes an investment company less flexible. However, a company offers more flexibility to the original owner of the investment asset, in that they can still access and benefit from the investment assets transferred into a company.

One way of structuring a family investment company is for shares with particular rights to be issued to different generations of the family. Typically, shares held by the parents or grandparents would have limited rights over the capital value of the company, but those shares would provide day to day control. The children would hold shares which have the rights to the majority of the capital, plus future accumulated growth or profits. Unlike a trust, there’s no 10 year charge on the value of the investment assets. Bespoke share classes can all have different rights over income, voting power and capital attached to them.

Another benefit of an investment company is, in many circumstances, dividend income’s not taxable in the company. This isn’t the case for all dividend income, but it can help improve investment yield.