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As a strict property investor, why should you consider tax efficient investments?
Working regularly with a lot of investors, we appreciate that many investors have very specific portfolio requirements. This can range from only wanting to bolster their portfolio with a high risk/high return investments right through to only investing in a certain asset class.
Looking at the latter point in particular, property is one of the most notable asset classes where we often see a strong preference from investors to focus their investments. And even from a non-investment perspective, it's not difficult to see why - house prices have almost continually risen over time.
Add into this there's a wide variety of routes into property investment, generally providing options for most portfolio requirements, and diversification within the asset class itself becomes possible to a certain text.
A key component of any investment strategy, whilst some level of diversification is possible within property, it's often advised to look at other asset classes to offer true diversity.
And the early stage startup sector can be a really beneficial one when exploring diversification.
There's a huge amount of variety in every sense within the asset class, so you can generally find something to suit your portfolio requirements. For example, as a property investor who has traditionally invested in low risk property bonds, startup investing is a higher risk/higher return strategy, so it can add an element of exposure to such assets.
But whilst the variety is a key element, for property investors, what can make it particularly attractive is the abundance of tax reliefs that are available.
These alone can make investing in startups extremely beneficial for property investors for a variety of reasons.
Reducing your capital gains tax liabilities
Let's look at the Seed Enterprise Investment Scheme (SEIS) and its capital gains tax relief as an example.
If you've sold a property and incurred a capital gain - let's say you bought it for £100,000 and sold it for £150,000, so you have a £50,000 gain - normally, assuming you have already used your tax free allowance, you'd be liable to pay CGT at up to 20%, which would be £10,000.
One of the reliefs available under the SEIS, however, is related to CGT and gives investors the ability to completely write off 50% of any incurred liability (regardless of how it was actually incurred) if the gain is invested into an SEIS investment opportunity.
This means that, using the example above, if you invested your £50,000 gain into an SEIS opportunity, your capital gains tax liability would be reduced to just £5,000. You can effectively write off 50% of a capital gain if you invest it into a SEIS opportunity.
However, it does need to be appreciated that this level of tax relief is provided as a way to encourage investment into really early stage companies. Seen as a higher risk investment - both with the potential for higher returns - the relief is intended to help mitigate the level of risk associated with investments at this stage.
Understanding that the risk can be too great for some portfolios, the SEIS's sister scheme, the Enterprise Investment Scheme (EIS), provides similar reliefs and incentives, but in a way that is more aligned with the slightly lower level of risk.
In relation to capital gains tax, the EIS provides deferral relief. What this effectively means is by investing any capital gain into an EIS investment opportunity, you can defer the associated gain until you dispose of your EIS shares. However, you could effectively defer your liability to an indefinite point in the future should you decide to not sell your shares.
Minimising your income tax relief
With CGT reliefs just one of the reliefs and incentives available under the SEIS and EIS, one of the other most notable is income tax relief.
Staying with the example above, if you invested that £50,000 gain into an SEIS opportunity, you'd not only halve your CGT liability, but you'd be able to reduce your income tax by £25,000.
This is because the SEIS offers investors 50% income tax relief to the value of their investment, up to an annual limit of £50,000 (based on a £100,000 investment limit).
To put this into perspective, this would almost completely write off the income tax liabilities for someone on a £95,000 per year salary.
Once again, such high level of tax relief is in direct relation to the higher risk levels that can be associated with SEIS investments, and the income tax relief available under the EIS is tapered to reflect the slightly lower risk levels.
Still extremely generous, investors into EIS opportunities are able to claim income tax relief at a rate of 30% of their investment, and this is available up to £300,000 per year (or £600,000 if investing into knowledge intensive companies).
Making your portfolio tax efficient
Making tax efficient investments can benefit your whole portfolio. It's not just about backing the next generation of British businesses and reducing your income tax relief in the process. It's about looking at your entire portfolio and discovering how you can target wider benefits.
Property investors often pay capital gains tax, but you could defer - or even write off - a liability with a focus on tax efficient investing.
Aspects like EIS and SEIS investments not being eligible for IHT, too, can make a welcome, balanced addition to a portfolio, as property investments would be taxed before being passed down to future generations.
As a property investor, tax efficient investing can be great and whilst you may prefer to focus on property for your primary investments, there's a huge amount of potential benefit in investing into tax efficient opportunities alongside your property investments.
Do your research, speak to a professional and work out the best way to truly strengthen your entire portfolio with tax efficient investments.