24 May 2022
Investments come in many shapes, from share portfolios to buy-to-let property. They all have their own challenges and making the wrong decisions can have serious consequences. These are not just limited to questions of which shares to buy or whether non-fungible tokens are a sound investment – you also need to think about how wealth should be held.
For example, think about rental property. In recent years there has been a trend to own buy-to-let property in a company. Corporate borrowing is not affected by restrictions to personal loan interest deductions and companies pay tax at 19 per cent rather than up to 45 per cent for an individual. The climate is changing though. Corporate tax rates rise to 25 per cent for most rental companies from next year, and the newly introduced social care levy increases the cost of withdrawing profits by up to 2.5 per cent. When you add this to the fact that Stamp Duty Land Tax rates can be much higher for companies buying property compared to individuals, the balance may be shifting back to owning property personally.
Share portfolios are another case in point. The best way to hold shares depends on the type of return you are looking for. For example, if you receive a dividend personally, you pay tax of up to 39.35 per cent. If you plan to reinvest the dividend, that takes a big bite out of your buying power. By comparison, if a company receives a dividend, it generally suffers no tax at all and can reinvest the whole amount (you still pay tax, but only when you take the money out of the company later).
On the other hand, if you sell shares at a profit, you pay capital gains tax at a maximum rate of 20 per cent. A company currently pays corporation tax at 19 per cent, but you have to pay tax again to access the profit it makes, effectively turning gains into income. This means that companies can be great for rolling up income receipts but very bad for reinvesting capital growth.
‘Wrappers’ such as insurance bonds or exchange-traded funds are all subject to specific tax codes, and two investments that look very similar can be taxed very differently. Are you better off with a ‘reporting fund’ where you pay some tax each year, or a ‘non-reporting fund’ where growth rolls up and is all taxed as income on disposal? The answer will depend on what you want to achieve in the first place.
In all of these cases, taking the wrong approach can be very expensive. To protect the value of investments you need to look at both the type of assets to hold, and the best way to hold them.