Ask the Expert: How can I invest my savings without paying too much tax?
Our reader this week wants to know the best way to invest some savings in the short term - and avoid paying too much tax. Carl Lamb of Almary Green explains.
I’ve been given some money – £20,000 – by my parents as part of their plan to reduce any inheritance tax that might need to be paid on their death.
I’d like to invest it for a couple of years or so until I need it to buy a bigger house (I’m hoping to start a family soon).
I’ve already used my ISA allowance this year so can you suggest please where I should invest my money and not pay too much tax on it?
Response from Carl Lamb of Almary Green
For this type of relatively short-term investment where you need to be able to guarantee the value of your money at the point when you need it, a cash investment account of some type is likely to be most suitable.
If you invested in stocks and shares, for example, there would be a danger that markets might be low at the time you wanted to get your money out and you could potentially get back less than you put in.
The good news is that interest on most cash investments – so accounts with banks, building societies, NS&I and credit unions accounts plus corporate bonds, government bonds and gilts – all count towards your Personal Savings Allowance.
If you are a basic rate taxpayer, you can earn interest up to £1,000 on your savings without incurring a tax liability.
Higher rate taxpayers get an allowance of £500. However, there is no Personal Savings Allowance available if you are an additional rate taxpayer.
One challenge with cash investments is that their returns have struggled to keep pace with inflation in recent years.
However, they do provide a guaranteed return and are generally secure as your deposit will be normally protected by the Financial Services Compensation Scheme.
Under the FSCS scheme, deposits of up to £85,000 per person per banking institution are protected, provided the account is held with a body that is authorised by the Prudential Regulation Authority.
Interest rates do vary: do shop around for the best returns. If you are prepared to tie your money up for a specific time, you may be able to get a better rate, but if you needed to withdraw the money before the end of the agreed term, you might incur a penalty.