I’ve recently inherited £35,000 and I’m not sure how to shield it from tax.
I know I want to put most of it in a stocks and shares Isa but it’s more than the current £20,000 allowance.
I don’t want to put my money in risky investments like VCTs or EIS.
What are some of my other options?
Shield: A stocks and shares Isa is a good way to protect your cash 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 will not have to pay any inheritance tax on the money as it falls below the £325,000 threshold, with 40 per cent normally being charged on any amount above that.
A stocks and shares Isa is a great way to protect this money from tax, but as you say the current Isa allowance is £20,000 per year.
While you can have more than one stocks and shares ISA, you can only contribute money to one Stocks and Shares ISA each tax year.
> Read our full guide to stocks and shares Isas
This means you could open a new stocks and shares Isa each year. However, you will be unable to pay money into your old stocks and shares Isas if you open new one.
However, given you still have three weeks, you still have time to open an Isa and put £20,000 in it before the 5 April deadline, although you will need to be quick. Then you could put the remaining £15,000 in it in the new tax year.
We asked two investment and tax experts what the best options are for shielding your inheritance from the taxman.
Jason Hollands, managing director of investment platform Bestinvest replies: Isas and pension are the two core pillars of tax efficient saving in the UK.
And the great news here is that following the Budget, pension subscriptions continue to attract relief at your marginal rate of income tax – for now – despite repeat talk of an overhaul. However, the downside is that pensions can only be accessed from age 55 currently (rising to 57 from 2028).
Of course, you will soon have a new Isa allowance you can take up in a few weeks, from 6 April. You can comfortably shelter your £35,000 from tax by using both sets of allowances and Isas are, of course very flexible, as there are no restrictions on withdrawals.
You don’t even need to invest the money in your Isa straight away, as you can hold some or all of the allowance initially in cash and then invest it later or in stages.
When it comes to saving, you should never let the tax tail wag the investment dog. VCTs and EIS can be attractive for the right person, but certainly aren’t for everyone.
Angharad Carrick says: You are right to be cautious of investing through VCT and EIS schemes, particularly if you are new to investing.
Venture capital trusts allow investors to buy shares in their portfolio of early-stage, usually privately owned, companies. In return for taking on this higher level of risk, they offer a tasty 30 per cent income tax break and tax-free dividends, along with an annual investment limit of £200,000.
With a reduction in the threshold for paying the 45 per cent additional income tax rate coming in April, as well as cuts to the £12,300 capital gains tax-free annual allowance (down to £6,000) and to the £2,000 tax-free dividend allowance (down to £1,000), more investors might be looking to VCTs.
But advisers say you must never invest solely for a tax break and there are some concerns about the effect all the money having flooded into VCTs in recent years has had on valuations.
You might want to consider putting some of the money into your pension if youy haven’t retired
David Gibb, chartered financial planner at Quilter replies: Stocks and shares Isas are a great way to shield your wealth from the taxman. The current £20,000 allowance is generous and you can put a good amount of your inheritance in there for the long-term.
It is important to remember that investing is for the long-term, a minimum of five years, to get the greatest potential of growth and ride out any volatility in the markets.
It is worth also identifying what you would like to do with the money as this may dictate where you place 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 can 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 can be the best place for some or all of the money. You will benefit from an uplift in tax relief from the Government and all investment growth and dividends are protected from tax too.
The recent Budget also raised the annual amount you can save into a pension to £60,000, while scrapping the lifetime allowance, so you should have plenty of headroom to put it in there and benefit your eventual retirement.
If the money is required more immediately, then it is worth remembering you also have a personal savings allowance of £1,000 if you are a basic rate tax payer or £500 for higher rate payers. This is the amount in interest you can receive before you start paying income tax on it.
It should be noted, however, that cash rates still massively lag inflation and thus should only be used for money that is required in emergencies or in the near term.
There is also the £1,000 per year dividend allowance, reducing to £500 in 2024/25, which means that if you invested £20,000 into a Isa and then £15,000 out of an Isa, any interest or dividends from the £15,000 would not be taxed, and then the money can be moved into an Isa the following tax year.
Finally, if applicable you can also use the money to top up any Isa allowance your partner may have or contribute to a child or grandchild’s Junior Isa or Junior Pension.
While you are in effect handing the money to them, it too will be shielded from tax and will allow you to leave your loved ones a legacy too and potentially kickstart a saving habit in young relatives.
Compare the best DIY investing platforms and stocks & shares Isa
Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.
When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming.
Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts.
When weighing up the right one for you, it’s important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
To help you compare the best investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you.
We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.
>> This is Money’s full guide to the best investing platforms and Isas
Platforms featured below are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
|Admin charge||Charges notes||Fund dealing||Standard share, trust, ETF dealing||Regular investing||Dividend reinvestment|
|AJ Bell*||0.25%||Max £3.50 per month for shares, trusts, ETFs.||£1.50||£9.95||£1.50||£1.50 per deal||More details|
|Bestinvest*||0.40% (0.2% for ready made portfolios)||Account fee cut to 0.2% for ready made investments||Free||£4.95||Free for funds||Free for income funds||More details|
|Charles Stanley Direct||0.35%||No platform fee on shares if a trade in that month and annual max of £240||Free||£11.50||n/a||n/a||More details|
|Fidelity*||0.35% on funds||£45 fee up to £7,500. Max £45 per year for shares, trusts, ETFs||Free||£10||Free funds £1.50 shares, trusts ETFs||£1.50||More details|
|Hargreaves Lansdown*||0.45%||Capped at £45 for shares, trusts, ETFs||Free||£11.95||£1.50||1% (£1 min, £10 max)||More details|
|Interactive Investor*||£9.99 per month, or £4.99 under £30k holdings, £12.99 for Sipp||£5.99 per month back in free trading credit (does not apply to £4.99 plan)||£5.99||£5.99||Free||£0.99||More details|
|iWeb||£100 one-off||£5||£5||n/a||2%, max £5||More details|
|Etoro*||Free but no Isa or Sipp||Investment account offers stocks and ETFs. Beware high risk CFDs in trading account||Not available||Free||n/a||n/a||More details|
|Freetrade*||Free for Basic account, £4.99 per month for Standard with Isa||Freetrade Plus with more investments and Sipp is £9.99/month inc. Isa fee||No funds||Free||n/a||n/a||More details|
|Vanguard||0.15%||Only Vanguard funds||Free||Free only Vanguard ETFs||Free||n/a||More details|
|(Source: ThisisMoney.co.uk Jan 2023. Admin % charge may be levied monthly or quarterly|