Research carried out by London Business School for the firm shows investors could be up to £70,000 better off over a 10-year period, after an initial investment of £500,000, if they take full advantage of their tax allowances.
The study compares two portfolios with the same characteristics from the start of the financial year 2001/2002, going to the end of the 2010/2011 tax year. One portfolio is being actively managed to enhance returns based on the tax profile of an investor, while the other doesn’t include any tax planning.
All returns on the £500,000 portfolio, which is split between a higher-rate tax payer and a lower-rate taxpayer, are reinvested.
"This is especially relevant given the volatile returns and increased taxes we’re seeing in the current environment," Maltin said.
In the first scenario, the £500,000 is split 50-50 between the two investors. Neither an ISA nor a CGT allowance is used, and no tax planning occurs. Income was hit during the holding period and capital gains tax removed a big chunk on exit.
The first portfolio took such a hit as income tax was charged at the higher rate on 50 per cent of the income return and at the lower rate on the remainder of the income.
Half of the capital gains were taxed at 18 per cent, and half were taxed at 28 per cent on exit.
"One of the biggest issues investors face is the tax on their income," said Gerald Smith, manager of Baillie Gifford's Monks Investment Trust. "So many don’t realise what an impact it has on their final investment."
In the second scenario, the full £500,000 was invested by the lower-rate tax payer and the ISA allowance for both parties was used over the 10 years. Income tax was charged at the lower rate for 100 per cent of the income return outside of that ISA, while maximum CGT allowances were used for both investors over each of the 10 years.
"It’s amazing how many investors still don’t think it’s worth taking advantage of their ISA allowance," Maltin added. "Given inflation is at around 5 per cent, taxes are so significant."
Bestinvest consultant James Sumpter pointed to other ways investors can make tax savings.
"For those investors who are higher-rate or top-rate tax payers, the tax rates on income are high and can make a significant dent in returns."
"They may wish to consider if it makes sense to take advice on whether to hold some of their assets in non-income producing tax wrappers such as offshore bonds," he said.
"Also there are often tax savings to be made by holding assets which pay the highest level of income in an ISA and those that produce capital growth outside of an ISA where you can use an annual capital gains tax-free allowance of £10,600 to shelter gains made."