The short story:

Tax optimisation means planning ahead to minimise tax, while staying in strict compliance with the law.

Our unique investment approach maximises use of the Capital Gains Allowance, helping you to save up to £2,460 per year, especially if you hold any investments outside an ISA or already max out your ISA. Capital Gains Allowance is dropping to £6,000 from April 2023 and then £3,000 from April 2024, so make sure you lock in your winning stocks/ETFs before then to save yourself a tax bill and a headache!

Traditionally, tax optimisation has only been available to the very wealthy or sophisticated investors. At narrative, we're making it accessible to the ordinary investor. Find out more here.

‍

The full narrative:

We’ll cover:

• What is tax optimisation?
• narrative’s unique approach
• Tax optimisation in practice 

What is tax optimisation?

Tax optimisation is forward planning to minimise your tax liability.

It’s important to distinguish it from tax evasion.

Tax evasion is when companies or individuals try to wriggle out of settling tax bills that they are legally bound to pay. Every year, the government loses out on billions of pounds in revenue as a result of tax evasion. In 2019/20, the financial loss from tax evasion was estimated at £5.5 billion.

In contrast, tax optimisation encourages full payment of taxes while making the most of the government’s own tax rules. For instance, this could mean investing in certain assets which attract tax relief, or maximising tax allowances. 

In a nutshell, it means planning ahead to minimise tax, while staying in strict compliance with the law.

‍

narrative’s unique approach to tax optimisation

Here’s how narrative optimises your taxes:

• Maximising your Capital Gains Allowance
• Putting your money to work

Maximising your Capital Gains Allowance

As a UK taxpayer, every year you can invest up to £20,000 into a Stocks and Shares ISA, meaning you won’t pay tax on any income or capital gains from your investment. 

Above this amount, you become liable to pay Capital Gains Tax on the profit from any asset that you sell that year. That could be the sale of shares that have gone up in value, or when selling a second home, antiques, art and so on.

Every year, you also get access to a Capital Gains Allowance of £12,300. If you sell assets such as taxable shares (those held in a General Investment Account or GIA), you can make a gain up to that amount without having to pay Capital Gains Tax. 

That means you can continue to invest beyond the £20,000 limit in the Stocks and Shares ISA, without being hit by a tax penalty. However, many ordinary investors don’t make the most of this allowance, preferring to hold on to shares year-to-year. No capital gains mean no tax, but also no allowance. Any allowance not used in that year is lost forever.

Traditionally, tax optimisation has only been available to the very wealthy or sophisticated investors. narrative’s use of Direct Indexing opens it up to the ordinary investor. It allows you to make the most of the Capital Gains Allowance, as individual shares can be sold when they go up in value, then repurchased again at a later date.

While you can do this to some extent with Exchange Traded Funds (ETFs, or bundles of stocks), direct indexing lets you sell individual stocks. This means you can still book a profit even when the market (or ETF) is flat overall, as some stocks will be performing better than others. Maximising this allowance can save you up to £2,460 per year. 

Putting your money to work

narrative aims to keep your money invested in the market, so you can realise capital gains without losing out on capital growth.

How does this work? 

When you sell shares to claim the Capital Gains Allowance, you have to wait 31 days before repurchasing those same shares. This is to prevent a practice known as Bed and Breakfasting, where shares were sold at night (before bed) and bought again the next morning (at breakfast time).

narrative will sell your stocks when they have gone up in value, so that you can realise the £12,300 allowance in full. After 31 days, we’ll then buy those same shares back.

In the meantime, we put your money to work. We can buy alternative stocks which are highly correlated with the ones we sold, or distribute the value across the rest of your portfolio. 

This unique approach means we maximise the amount of time your money is invested in the market, while minimising your tax liability. Planning ahead, so that your investments work for you.

‍

Tax optimisation in practice

To show you how it works in practice, we’ll take you through an example of a higher rate taxpayer with £100,000 to invest. 

Norma invests £100,000 in a GIA with narrative. Her brother Norman invests the same amount in a GIA with a traditional fund manager.

By the end of the year, Norma’s £100,000 has increased by 8%*, to £108,000. narrative sells those individual stocks which have gone up in value, while not touching those which have gone down or stayed the same. This means we have realised the gain. Norma pays no tax on this sale, as it’s within her Capital Gains Allowance.

After 31 days, we buy Norma’s stocks back. Entering the second year, Norma’s investments are now worth £108,000. Your allowance also gets reset, so any capital gains will be starting from that base.

‍

‍

As for Norman, his investment has also increased to £108,000. He’s happy with the performance, and leaves it where it is.

By year 10, Norma’s initial investment has more than doubled in value, consistently growing 8%* p.a. to £216,000. She wants to sell her investment so she can finally fulfil her dream of owning a holiday home in the south of France. Because narrative has maximised her Capital Gains Allowance, she’ll pay just £1,000 in tax and be left with £215,000.

Norman also doubled his investment. But because he never realised those gains, he now has to pay tax on his earnings above the Capital Gains Allowance in year 10. He made £116,000 in profit, less the allowance of £12,300, giving a taxable base of £103,700. As a higher rate taxpayer he pays 20% tax on that, or £20,740. 

Maybe Norman will have to save a bit longer before he can afford his holiday home.

‍

* 8% is equivalent to the average FTSE 250 growth rate since 2005

‍

‍

‍

‍

The narrative difference

Taxes need not be taxing. narrative is committed to simplifying tax optimisation and making it available to everyone. 

Get early access