Tax efficient investments
When it comes to investing, making the most of tax efficient vehicles is paramount. These include:
- You can invest an amount in an ISA every year. The amount invested does not attract tax relief but the income and gains on the investment are tax free, so any taxpayer will benefit from the tax shelter on the income arising. Tax credits on dividend income cannot be recovered. However investments in an ISA are not free from a tax charge to IHT on death.
- The limits for each individual for ISA investments for the current tax year are £11,520 in total (with up to £5,760 in a cash ISA).
Enterprise Investment Scheme (EIS), Seed enterprise investment scheme (SEIS) and Venture Capital Trusts (VCTs)
- These three schemes allow ingoing tax relief on investments that are channelled into venture capital for smaller and growing businesses. By their very nature they are considerably more risky than ISAs and other similar investment vehicles.
- The EIS scheme provides 30% tax relief on investments of up to £1,000,000 in a tax year. Investments can be carried back by up to one year provided the limit in the previous year was not reached; the limit last year was £500,000.
- EIS shares are exempt from capital gains tax once they have been held for three years All tax reliefs depend on the qualifying conditions being met for three years.
- Capital gains tax on the disposal of other assets can be deferred by reinvesting the proceeds in EIS shares. This relief is slightly different from the basic EIS relief, as there is no limit on the gain that can be reinvested in this way. However, the tax on the original gain will become payable when the EIS investment is sold. The reinvestment can take place up to three years after (or one year before) the original disposal.
- SEIS provides 50% tax relief on a maximum annual investment of £100,000 in shares in higher risk, early stage companies. Shares must be held for a period of three years from the date of issue for the relief to be retained.
- Provided the cost of the shares remains qualifying for income tax relief there is no liability to capital gains tax on the disposal of the shares after the three year qualifying period.
- Income tax loss relief is available on any losses incurred over and above the initial income tax relief received. For example, if an EIS investment of £10,000 completely fails then after deducting the initial £3,000 income tax relief received, the remaining £7,000 ‘loss' is eligible for tax relief. Therefore, a 45% taxpayer could recover a further £3,150 in respect of an income tax refund.
- VCT investments are made through a fund, so the risk on individual investments is spread across the fund. The tax relief is 30% of the amount invested, with a limit of £200,000 in any tax year.
- VCT investments are not subject to capital gains tax if they are held for 5 years. Dividends are not subject to higher rate tax, but the tax credit is not repayable.
- A new scheme, similar to EIS has been introduced this year. Seed EIS is intended for start-up companies and their investors. A very generous rate of relief of 50% is available on up to £100,000 invested in a year and, with deferral of capital gains also available, this brings the total ingoing tax relief up to a possible 78%. However, this is only appropriate for a small number of investors, so you may need to look at the conditions quite carefully before deciding this is appropriate for you.
- Pension contributions are paid net of basic rate tax, and the pension provider recovers the tax element. Up to £3,600 per year (gross) may be invested by any individual irrespective of whether they have earnings to match it or not.
- Pension contributions also save higher rate and additional rate tax for those liable, and this relief is normally given through the self assessment tax return.
- Tax relief is generally only available for pension contributions of up to £50,000 a year, including contributions made by your employer.
- You may be able to use up any unused relief from the last three years, making a substantial contribution in one year if the previous years have been low. However, it is essential that you know your ‘pension input period' in order to plan for this - it is not usually the same as the tax year, so you will need to check. We can advise you as to what level of contributions would be allowable in the current year.
- If you are a member of a defined benefit or final salary scheme, your £50,000 limit is tested against the value of your benefits under the scheme rather than the contributions made. You may need to contact your pension administrator in order to get the information you need to plan additional contributions.