How Partners can take advantage of reliefs with tax-efficient investing

In the 2024 to 2025 tax year, an estimated £41.2 billion of tax breaks existed for smart investors to utilise – seven per cent higher than the previous year.

As a Partner, you’ll want to make the most of your wealth by investing your dividends wisely to generate interest.

Taking advantage of the wide range of investment reliefs and benefits could significantly reduce your tax liability.

Here are some of the key benefits and tax reliefs available to you in the new tax year.

Individual Saving Accounts

Individual Savings Accounts (ISAs) are a significant contributor to tax relief.

You can invest a maximum of £20,000 per year tax-free into an ISA.

If you utilise this and invest before 5 April, you can enjoy the benefit of a full tax year with your tax-free growth that can then be utilised either later in the year or in the future as you require it.

Do not forget to invest more at the start of the next year to further optimise the utility of your ISA.

Pension contributions

While pensions are soon to be less tax-efficient than they once were, given the changes to Inheritance Tax (IHT), smartly investing in pensions may still be a useful way to offset Income Tax.

By using a salary sacrifice scheme and incorporating dividends into your renumeration strategy, you can prevent yourself from entering higher Income Tax brackets and move funds into your pension pot instead.

As the access to your pension is still not as culpable for tax as a salary, this remains a smart investment strategy.

Be mindful, however, that your unspent pension pot will be considered part of your estate for IHT purposes from April 2027.

Changes to Capital Gains Tax

Capital Gains Tax (CGT) has recently undergone notable changes to reduce its tax efficiency.

Where once the tax-free threshold was £6,000, it is now £3,000.

While disappointing for those seeking it as a viable way to offset tax payments, the fact remains that some relief is better than none.

Combining CGT relief with other forms of smart investment can be a vital part of a tax-efficient investment strategy.

Venture capital schemes

If you have the capacity, Venture Capital Schemes (VCTs) can be an extremely tax-efficient way to invest.

VCTs offer 30 per cent Income Tax relief on invested amounts up to £200,000, and these can also yield tax-free dividends with the added benefit of there being no CGT on gains.

If your investment budget stretches to it, an Enterprise Investment Scheme (EIS) offers 30 per cent relief on investments up to £1 million.

These can be combined with other forms of relief to provide a network of tax-efficient investment options.

Limited companies for investment property

If you own investment property, a limited company structure can offer a way to reduce tax liabilities and improve long-term financial planning.

If you own a rental property as an individual, your rental profits are subject to Income Tax at your personal rate – 20 per cent, 40 per cent, or even 45 per cent for higher earners.

In contrast, rental profits in a company are taxed at Corporation Tax rates, which currently stand at 19 per cent for profits up to £50,000 and 25 per cent for profits above £250,000.

Additionally, while individual landlords are restricted to a 20 per cent tax credit on mortgage interest, companies can deduct mortgage interest as a business expense, making company ownership more attractive for those with significant borrowing.

Furthermore, if you do not need to withdraw rental income for personal use, leaving profits in the company can be tax efficient.

Unlike personal ownership, where all rental profits are taxed annually, a company can retain profits and reinvest them into further property purchases or other investments.

Holding property in a company may also provide greater flexibility for estate planning.

Shares in a company can be passed down more easily than physical property, and, if structured correctly, it may allow for more efficient IHT planning.

Capitalise on investment, minimise on tax

With a range of options available to make your investments as tax efficient as possible, there is huge scope for minimising your tax liability.

However, you must always seek professional advice before deciding where to invest your hard-earned cash.

At Moore Thompson, we provide comprehensive tax planning services for Partners at solicitors’ firms.

We can offer you impartial advice on tax efficient strategies for your savings, pensions, and investments – ensuring you make the most of the wealth you’ve earned from your legal practice.

To make the most of tax relief on your investments, contact our expert team today.