How High Net-Worth Investors Can Use IFISAs for Tax-Efficient Wealth Growth
This is a financial promotion and is intended to provide information, not investment advice.
For high-net-worth individuals (HNWIs), tax efficiency is a fundamental pillar of wealth preservation. With income tax, capital gains tax, and dividend tax all eroding investment returns, strategic asset allocation and intelligent tax planning are critical to maintaining and growing capital over the long term.
One of the most underutilised yet highly effective tools in tax-efficient investing is the Innovative Finance ISA (IFISA). While often overlooked in favour of traditional ISAs, an IFISA provides a unique combination of tax-free growth, attractive target returns, and asset-backed security—a compelling proposition for investors seeking stable, long-term wealth accumulation.
With the April 5th tax year-end approaching, high-net-worth investors should be evaluating their portfolios to ensure they fully utilise their annual ISA allowance, protecting more of their wealth from taxation while maximising long-term, tax-free gains.
Why Tax Efficiency is Key for Wealth Preservation
One of the greatest threats to investment portfolios - particularly for HNWIs - is the erosion of returns through taxation. With increasing scrutiny on high earners and potential tax hikes in future years, ensuring that as much capital as possible is shielded from tax is crucial.
Key Tax Challenges for High Earners
1. Income Tax on Investments
• Higher-rate taxpayers face a 40% tax rate, while additional-rate taxpayers face 45% tax on interest earnings.
• Even savings interest outside of ISAs is taxed once it exceeds the £500 personal savings allowance.
2. Dividend Tax
• The tax-free dividend allowance is £500 in 2024/25.
• For higher-rate taxpayers, dividends are taxed at 33.75%, while additional-rate taxpayers face 39.35% tax on dividends.
3. Capital Gains Tax (CGT)
• The annual CGT exemption is £3,000 in 2024/25.
• For high earners, CGT is 20% on most assets and 28% on property sales, significantly reducing net profits.
The Role of IFISAs in Tax Efficiency
While many HNWIs focus on tax-efficient structures such as pensions, venture capital trusts (VCTs), and enterprise investment schemes (EISs), the IFISA remains an overlooked but valuable option.
• Tax-Free Growth – Any returns earned within an IFISA are entirely tax-free, meaning investors keep 100% of their gains.
• No CGT or Dividend Tax – Unlike shares, bonds, or property investments, IFISA earnings are exempt from CGT and dividend tax.
• Annual Allowance Maximisation – With a £20,000 annual ISA limit, IFISAs provide an effective way to shelter wealth from taxation.
For sophisticated investors, incorporating an IFISA into their long-term tax strategy is a simple yet effective way to preserve and enhance wealth while diversifying risk exposure.
How an IFISA Fits into a Diversified Investment Strategy
A well-structured HNW investment portfolio typically includes a mix of equities, fixed income, alternative assets, and tax-efficient vehicles. The IFISA is a strong complement to existing allocations, particularly for those seeking:
1. A Balance Between Risk and Return
Unlike Cash ISAs, which offer security but low returns, or Stocks & Shares ISAs, which can be volatile, an IFISA provides a middle ground—offering property-backed security while delivering higher target returns than traditional savings accounts.
2. Protection Against Market Volatility
With rising global uncertainty, stock market fluctuations remain a key concern for investors. IFISAs allow investors to access consistent, asset-backed returns without the short-term swings of public equities.
3. Fixed Income-Like Stability, Without the Tax Burden
Many HNWIs allocate a portion of their portfolio to fixed income investments such as corporate bonds and gilts. However, these are taxable, reducing their net yield. IFISAs provide a tax-free alternative, delivering competitive returns without income tax deductions.
4. Property-Backed Security Without Direct Ownership Risks
Investing in direct property assets often requires significant capital, carries liquidity risks, and involves taxation on rental income and capital gains. IFISAs allow for exposure to property-backed lending without the hassle of ownership, taxation, or maintenance costs.
What Sophisticated Investors Need to Know Before April 5th
With the tax year drawing to a close, investors should be assessing their portfolios and taking action before the deadline to ensure they are making full use of their tax-free allowances.
1. Maximise the £20,000 ISA Allowance
HNWIs who have not yet utilised their full £20,000 ISA allowance should act before April 5th. Any unused portion cannot be carried forward and is permanently lost.
2. Consider Transferring from a Cash ISA
For those who already hold large balances in Cash ISAs, now is the time to consider transferring funds to an IFISA to achieve better risk-adjusted returns. Unlike Cash ISAs, which often fail to keep pace with inflation, IFISAs offer an opportunity to generate real returns over time.
3. Replace Withdrawn Funds in a Flexible IFISA
HNWIs who have previously withdrawn funds from a Flexible IFISA should ensure they replace those funds before April 5th to retain their full tax-free investment space for the year.
4. Diversify Across Tax-Advantaged Investment Vehicles
For those already maximising pension contributions, VCTs, and EISs, an IFISA serves as another tax-efficient pillar within a well-rounded investment portfolio.
5. Plan for the Next Tax Year
Investors should consider early ISA contributions from April 6th onward to maximise their returns for that year.
Final Thoughts: Why IFISAs Are a Smart Move for HNWIs
For high-net-worth investors looking to preserve capital, generate stable returns, and reduce tax liabilities, an IFISA is a compelling yet underutilised tool.
• ISA allowances reset each year, making annual contributions essential for long-term tax efficiency.
• An IFISA can complement a well-diversified portfolio, offering attractive returns without market volatility.
• Tax efficiency is more critical than ever, especially as allowances shrink and taxation on investments increases.
With the April 5th deadline approaching, now is the time for HNWIs to review their portfolios and ensure they are taking full advantage of every tax-free investment opportunity available. By acting now, investors can protect and grow their wealth tax-efficiently, securing a stronger financial position for the years ahead.
Capital is at risk. Past performance is no guarantee for future results.
Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future.