How to make the most of your general investment account

Investing within a tax-efficient wrapper is one of the key ways to reduce your tax liability, for example, making full use of your £20,000 individual savings account (Isa) allowance every year, if you can, and regularly contributing to pensions. But there are a number of circumstances in which you may have to hold some of your investments within a general investment account (GIA).

If have used up your Isa allowance and you have more money to invest, you may need a GIA. And even if you have allowance remaining, if you receive a large lump sum you may not be able to put it into your Isa all in one go.

You might not wish to put more into a pension, meanwhile, because you cannot access these until you are age 55 or, from 2028, 57. And if you have already accessed your pension or are a very high earner, the amount you can put into your pension each year while still getting tax relief might have been reduced to as little as £10,000.

Tax-efficient strategies

Because a GIA is not a tax-efficient environment like pensions and Isas, you can minimise the tax liability of the investments within it and reduce its costs as much as possible. 

Firstly, consider whether this money actually needs to be in a GIA. James Corcoran, senior chartered financial adviser at Lumin Wealth, says: “The first question is about access. Do you wish to retain funds in your name to be drawn upon in your lifetime, or are you [certain that] you are unlikely to ever need the funds?” In the first instance, a GIA is a good option but in the second, some form of inheritance tax planning could be what you actually need.

Unlike with an Isa, GIA portfolio gains are subject to capital gains tax (CGT) and dividends to dividend tax. You should use both your capital gains tax (CGT) and dividend allowances every year, though the CGT allowance will decrease from £6,000 this tax year to £3,000 in 2024-25 and the dividend allowance from £1,000 to £500.

To use the CGT allowance – the amount of gains you can make each year on which you don't have to pay CGT – you need to sell assets to trigger a gain. If it makes sense for you to do this, you could move the proceeds into an Isa or pension, perhaps into the same investments. If you can't or don't want to do this, you could still sell assets and offset the gains against the CGT allowance, and then immediately use the proceeds to purchase similar, but not the same investments. This is because selling and repurchasing the same asset within less than 28 days outside pensions and Isas is not allowed for the purposes of utilising you CGT allowance.

Ian Cook, chartered financial planner at Quilter, explains: “For example, if a BlackRock US tracker has gains, you could sell it, realise the capital gain, and immediately purchase a similar Vanguard US tracker. This maintains market exposure while using the CGT allowance.” 

The CGT allowance operates on a ‘use it or lose it’ basis, so can’t be applied retrospectively. But allowable losses can be offset against gains from the same tax year or carried forward to a future tax year, as long as they are reported to HM Revenue & Customs within four years of the end of the tax year in which the asset was disposed of. (See How to calculate your CGT, IC, 20.05.22)

A good place for gilts

Isas and GIAs arguably serve a similar purpose, to hold investments which you might need to draw from in the future. They can be particularly useful before your retirement age or to supplement retirement income, for example, if you want to preserve your personal pensions as an inheritance. So treat Isas and GIAs as part of a comprehensive strategy rather than as separate entities.

Corcoran says: “You could argue that the more important aspect is holding the most optimal investment overall, whatever the tax wrapper. Yes, tax may be incurred, but you don’t want the ‘tax tail to wag the investment dog’ and ultimately long-term growth tends to be the key thing to aim for.”

That said, thinking about which assets to prioritise holding in your Isa can make sense. Stocks and funds which pay significant dividends should be among the first to go into an Isa, followed by stocks with high capital gain potential. This is because the dividend tax rate is 33.75 per cent for higher rate taxpayers and 39.35 per cent for additional rate taxpayers, but the CGT rate for non property investments is 20 per cent for these tax bands. Basic-rate taxpayers, however, pay dividend tax at 8.75 per cent and non property CGT at 10 per cent.

Cook likes holding short-dated gilts (UK government bonds) within GIAs. These offer capital uplift with low income levels, which means minimal tax on their interest payments. Gilts are also exempt from CGT which makes them some of the best assets to hold in an unwrapped account – provided that holding them is a part of your investment strategy – don't just buy them because they are tax efficient. And the income paid by gilts held outside a tax wrapper is still taxable, if not covered by your annual personal savings allowance of £1,000 for basic rate tax payers and £500 for higher rate tax payers.

Gilts have proven particularly popular this year. In June, investment platform Interactive Investor reported that it registered an 879 per cent increase year-on-year in direct fixed-income trades, 95 per cent of which were gilts. And gilts which mature in 2024, 2025 and 2023 were the three most popular choices. While they have become more attractive due to the rise in interest rates, in the long-term gilts are considerably less likely than equities to keep up with inflation, so their main roles in a portfolio are capital preservation and diversification.

Best platforms for a general investment account

Most platforms charge the same for a general investment account as they do for an Isa, and you can get an idea of which might be the best for your investment and financial requirements by looking at our 2023 Isa special platform table (Isa platforms compared IC, 24.03.23). However, having a GIA can be cheaper than having an Isa on certain platforms, most notably Hargreaves Lansdown.

This platform is known for providing great service in exchange for a pretty hefty fee, and that is the case if you invest in funds. But if you only invest in listed equities, including investment trusts and exchange traded funds, there is no annual platform fee for the GIA while for Isas it is capped at £45 a year. Coupled with Hargreaves Lansdown’s recent decision to waive regular investing fees, this represents very good value for money, although there are still dealing fees.

Freetrade, meanwhile, allows you to open and run a GIA via its Basic plan for free, and this includes commission-free trades. It offers a choice of about 1,500 stocks in which to invest the GIA. But to open an Isa, you have to opt for its Standard or Plus plans which cost £5.99 or £11.99, respectively, a month, and they allow access to Freetrade's full range of over 6,000 stocks.