I recently inherited £35,000 and I don’t know how to protect it from tax.
I know I want to put most of it in Isa stocks and shares, but that’s more than the current allocation of £20,000.
I don’t want to invest my money in risky investments like VCTs or EIS.
What are my other options?
Shield: A shares and Isa shares are a good way to protect your money from tax
Angharad Carrick of This Is Money says: You are right to consider your options, especially with the end of the tax year looming.
You won’t have to pay inheritance tax on the money as it falls below the £325,000 threshold, with 40% normally charged on any amount above that.
A stock and shares Isa is a great way to protect that money from tax, but as you say the current Isa allowance is £20,000 a year.
Although you can have more than one stock and equity ISA, you can only contribute money to one stock and equity ISA each tax year.
> Read our complete guide to Isas shares and shares
This means you can open a new Isa stock and shares every year. However, you will not be able to deposit money on your old stocks and shares if you open a new one.
However, given that you still have three weeks, you still have time to open an Isa and put £20,000 into it before the April 5 deadline, although you have to be quick. Then you could put the remaining £15,000 into it in the new tax year.
We asked two investment and tax experts what the best options are for protecting your inheritance from the taxman.
Jason Hollands, Managing Director of investment platform Bestinvest responds: Isas and retirement are the two pillars of tax-efficient savings in the UK.
And the good news here is that following the budget, pension underwriting continues to attract relief to your marginal income tax rate — for now — despite repeated talk of an overhaul. However, the disadvantage is that pensions are only accessible from the age of 55 currently (rising to 57 from 2028).
Of course, you will soon have a new Isa allowance to collect in a few weeks, from April 6th. You can comfortably protect your £35,000 from tax using both sets of allowances and the Isas are, of course, very flexible, as there are no restrictions on withdrawals.
You don’t even need to immediately invest the money in your Isa, as you can hold part or all of the allocation initially in cash and then invest it later or in stages.
When it comes to saving, you should never let the tax tail shake the investment dog. VCTs and EISs can be appealing to the right person, but they certainly aren’t for everyone.
Angharad Carrick says: You are right to be cautious when investing through VCT and EIS programs, especially if you are new to investing.
Venture capital trusts allow investors to buy shares in their portfolio of start-up, usually private, companies. In return for taking on this higher level of risk, they offer a tasty 30% tax break and tax-free dividends, plus an annual investment limit of £200,000.
With a reduction in the threshold for paying the additional tax rate of 45% coming in April, as well as reductions in the tax-free annual allowance of £12,300 on capital gains (up to £6,000) and of the tax-free dividend of £2,000 (up to £1,000), more investors may turn to VCTs.
But advisers say you should never invest just for tax relief and there are concerns about the effect all the money that has flooded VCTs in recent years has had on valuations.
You may want to consider putting some of the money into your pension if you are not retired
David Gibb, Certified Financial Planner at Quilter responds: Isas stocks and shares are a great way to protect your assets from the taxman. The current £20,000 allowance is generous and you can invest a good part of your long-term inheritance in it.
It is important to remember that the investment is for the long term, a minimum of five years, to obtain the greatest potential for growth and overcome any volatility in the markets.
It is also worth identifying what you would like to do with the money as this may dictate where you put it.
If you don’t need it for anything in particular and are happy to wait potentially many years to access it, then a pension may be the best place for some or all of the money.
If you don’t need it for anything in particular and are happy to wait potentially many years to access it, then a pension may be the best place for some or all of the money. You will get increased tax relief from the government and all investment growth and dividends are also protected from tax.
The recent budget also increased the annual amount you can save in a pension to £60,000, while scrapping the lifetime allowance, so you should have plenty of room to invest it and enjoy your eventual retirement.
If money is needed more immediately it is worth remembering that you also have a personal savings allowance of £1000 if you are a basic rate taxpayer or £500 for higher rate taxpayers . This is the amount of interest you can receive before you start paying income tax.
It should be noted, however, that cash rates still lag far behind inflation and should therefore only be used for cash needed in an emergency or at short notice.
There’s also the dividend allowance of £1,000 a year, reduced to £500 in 2024/25, which means if you invest £20,000 in an Isa and then £15,000 on an Isa, any interest or dividend of the £15,000 would not. be taxed, then the money can be transferred into an Isa the following tax year.
Finally, where applicable, you can also use the money to top up any Isa Allowance your partner may have or contribute to the Junior Isa or Junior Pension of a child or grandchild.
While you actually hand over the money to them, it will also be tax-sheltered and also allow you to leave an inheritance to your loved ones and potentially start a savings habit in young parents.
Compare the Best DIY Investment Platforms and Isa Stocks & Stocks
Investing online is simple, inexpensive and can be done from your computer, tablet or phone when and where it’s convenient for you.
When it comes to choosing a DIY investment platform, Isa stocks and shares, or a general investment account, the range of options can seem overwhelming.
Each provider has a slightly different offering, charging more or less for trading or holding stocks and providing access to a different range of stocks, funds and investment trusts.
When choosing the one that’s right for you, it’s important to consider the service it offers, as well as the administration and trading fees, and any other additional costs.
To help you compare the best investment accounts, we’ve analyzed the facts and put together a comprehensive guide to choosing the best and cheapest investment account for you.
We highlight the major players in the table below, but advise you to do your own research and consider the points in our comprehensive guide linked here.
>> This is Money’s complete guide to the best investment platforms and Isas
The platforms presented below are independently selected by This is Money’s specialist journalists. If you open an account using links that have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
|Administration fees||Expense||fund trading||Standard Stock, Trust, ETF Trading||Regular investment||Reinvestment of dividends|
|A.J. Bell*||0.25%||Max £3.50 per month for stocks, trusts, ETFs.||£1.50||£9.95||£1.50||£1.50 per transaction||More details|
|Bestinvest*||0.40% (0.2% for out-of-the-box wallets)||Account maintenance fees reduced to 0.2% for ready-to-use investments||Free||£4.95||Free for funds||Free for income funds||More details|
|Charles Stanley live||0.35%||No stock platform fees if a trade is made that month and an annual maximum of £240||Free||£11.50||n / A||n / A||More details|
|Loyalty*||0.35% on funds||Fees from £45 up to £7,500. Max £45 per year for stocks, trusts, ETFs||Free||£10||Free funds £1.50 stocks, ETF trusts||£1.50||More details|
|Hargreaves Lansdown*||0.45%||Capped at £45 for stocks, trusts and ETFs||Free||£11.95||£1.50||1% (minimum £1, maximum £10)||More details|
|Interactive Investor*||£9.99 per month, or £4.99 under £30,000, £12.99 for Sipp||£5.99 per month back in free trading credit (not applicable to £4.99 plan)||£5.99||£5.99||Free||€0.99||More details|
|iWeb||£100 single||£5||£5||n / A||2%, maximum £5||More details|
|Etoro*||Free but not Isa or Sipp||The investment account offers stocks and ETFs. Beware of high risk CFDs in the trading account||Not available||Free||n / A||n / A||More details|
|Free exchange*||Free for Basic account, £4.99 per month for Standard account with Isa||Freetrade Plus with more investments and Sipp is £9.99/month including tax. Isa Fee||no funds||Free||n / A||n / A||More details|
|Avant-garde||0.15%||Only Vanguard funds||Free||Free Vanguard ETFs only||Free||n / A||More details|
|(Source: ThisisMoney.co.uk January 2023. A percentage administrative charge may be levied monthly or quarterly|
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.