Ethical Investment

by Nick

Tax efficient ethical investment with ISAs and VCTs

There are plenty of solutions for ethical investment out there, but it can be difficult to do a really good job – regarding both ethics and returns – without looking outside the box. A stocks and shares ISA might provide more opportunities than you think.

When it comes to investing your money for the future, there are many different factors to consider. Ethical investment brings yet another layer of complexity to the decisions you need to make. Either way, however, it makes sense to ensure that your money is working as hard as possible for you by using tax efficient vehicles wherever possible. Tax relief is built into pension contributions, which is why making the most of your pension can be a good idea. ISAs are another way, and are often more flexible than pensions since you can access them at any time. With ISAs, the tax benefits happen at the other end. You are taxed on the money you put into it, but the returns are tax free (the opposite to what happens with a pension).

A stocks and shares ISA can be a tax efficient way to approach ethical investment, and you may be surprised at the breadth of investments you can include in them. Because ethics are quite a personal thing, it can be hard to find investments that truly match your aims. An IFA with a good track record in ethical investing should be able to open some new doors to you and give you new ideas.

For this tax year, you are allowed up to £10,200 in an ISA – half of which can be cash. The other £5,100 can be held in a stocks and shares ISA. If you don’t use your ISA allowance for the year, it is not rolled over to the next. However, any growth on the investments you make is not subject to tax. This means they can be a great way to shelter your ethical investments from personal income or capital gains tax.

The range of assets you can hold in a stocks and shares ISA is very broad – something of interest to the ethical investor, since it can be hard to find investments that reflect the unique concerns that make up your personal ethics. You can obviously hold shares in as many companies as you like. But you can also place ETFs in this tax protection ‘wrapper’, such as clean energy ETFs. Ethical investment management can be further diversified by considering unit trusts, investment trusts, OEICs, gilts and corporate bonds. A stocks and shares ISA doesn’t just have to house stocks and shares.

For the wealthier ethical investor, there are further tax-efficient options, including ethical or green VCTs (venture capital trusts). If you have used your ISA allowance, or require something more sophisticated and personal, these might be one to explore with an IFA. VCTs are unregulated collective investment vehicles. They are similar to investment trusts in structure and are quoted on the London Stock Exchange. Their purpose is to give investors access to collections of small companies (such as those listed on the AIM) and unquoted companies, in which it would otherwise be difficult to invest. These are of relevance for ethical investment since there are a number of VCTs specialising in green technology, amongst other things. VCTs come with very significant tax benefits. However, it is important to remember that, although they offer potentially higher returns, they come with an associated higher risk.

Tax efficiency is an important concern for ethical investment, as it is for regular investing. For many people, a stocks and shares ISA will offer all the space and flexibility required, since they can include a broad range of investments. Wealthier investors who have used their ISA allowances might want to consider other tax-efficient ways of investing ethically, including in VCTs. However, this is a complex and specialist area, and it’s worth consulting with an experienced IFA about the advantages and restrictions, and whether they are suitable for your circumstances.

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