What tax favoured investments could you utilise before tax year-end?
DISCLAIMER: The purpose of this insight post is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.
For those who qualify, the UK tax system contains reliefs and allowances for individuals, offering deferrals and tax savings.
The utilisation of the reliefs associated with tax favoured investments as part of a balanced portfolio can make a big difference to future returns.
However, it is important to consider the risks associated with them and it is essential that professional advice is sought. This blog will give you an indication of what might be best for your personal finances:
Utilise individual savings accounts
Individual savings accounts (ISAs) are an excellent investment for higher rate taxpayers. The maximum allowance is £20,000. You must save or invest by 5 April for it to count for that year and if you don’t use the allowance it is lost. The ISA family has grown considerably since its inauguration in 1999, with a further five ISAs to consider:
- Help to Buy ISA: where first-time buyers get a 25% cash bonus from the Government on savings made into a help to buy ISA. The help to buy ISA closed to new accounts on 1 December 2019. If you have already opened a help to buy ISA, you will be able to continue saving into your account until November 2029.
- Inheritance ISA: which allows a spouse or civil partner to inherit the savings in an ISA belonging to their deceased loved one without triggering income tax.
- Lifetime ISA (LISA): where UK residents aged between 18-39 can contribute up to £4,000 per tax year and the Government will then add a 25% bonus at the end of each tax year in respect of the contributions paid.
- Flexible ISA is a basic ISA which allows you to withdraw and replace money from your ISA.
- Innovative finance ISA (IFISA) lets you put your savings with peer-to-peer lenders or invest in companies through crowd funding websites.
Consider investing in enterprise investment schemes and Seed EIS Shares
Tax relief is available where you subscribe for shares qualifying for enterprise investment schemes (EIS) or Seed EIS (SEIS) relief. Under the EIS scheme, your tax liability for the year may be reduced by up to 30% of the sum invested. In addition, capital gains from disposals in the previous 36 months or following 12 months may be reinvested into EIS shares, resulting in a deferral of the gain. You can invest up to £1m under EIS in the year or up to £2m if you invest in knowledge-intensive companies (broadly these are early-stage businesses engaged in scientific or technological innovation).
The Seed EIS scheme offers another form of reinvestment relief for investors who subscribe for shares in small start-up companies. Currently, the maximum qualifying investment is £100,000 per tax year.
Income tax relief is given at the rate of 50% of the sum invested, and relief may be given against tax in the tax year the investment is made or the prior tax year. Both EIS and SEIS shares are normally exempt from capital gains tax (CGT) and inheritance tax (IHT), subject to detailed conditions being met.
A number of professionally managed EIS and SEIS investment funds exist which invest in a broad range of EIS and SEIS companies on behalf of investors. Whilst such funds should allow for risk management through the spreading of your investment between different companies, it must be remembered that EIS and SEIS investments will, more likely than not, be viewed as carrying with them a high degree of risk.
Venture capital trusts
Venture capital trusts (VCTs) are specialist tax incentivised investments that enable individuals to invest indirectly in a range of small higher-risk trading companies and securities. VCTs are companies in their own right and, like investment trusts, their shares trade on the London Stock Exchange.
Shares in qualifying VCTs offer the following tax incentives
- Upfront income tax relief at 30% of the amount subscribed, subject to a maximum investment of £200,000 per tax year. The investment must be held for a minimum of five years in order to retain the income tax relief. Note that income tax relief on the purchase of VCTs is available only where new shares are subscribed, and not for shares acquired from another shareholder.
- Dividends received on VCT shares are exempt from income tax in respect of shares acquired within the ‘permitted maximum’ (including shares acquired from another holder).
- CGT exemption applies on the VCT shares (including shares acquired from another holder).
Family investment companies
Family investment companies (FIC) can be a useful way to protect family wealth. The most appropriate structure will depend on the family’s circumstances and objectives. A FIC enables parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.
By subscribing for shares in the company and making loans to it, the family directors can then invest as appropriate via the corporate structure. If the company makes profits, the profits will be subject to corporation tax at just 19%, presenting a significantly greater advantage than if the investments had been held directly and suffered Income Tax at 40%/45% or through a trust where the rates applicable to trusts would be applied.
If the company receives UK dividend income from investments in shares, it will be exempt from tax. However, interest (from saving accounts), rents (from investment properties) and other income will be taxable. Losses from rental income can be offset against other income in the company.
Gains in a FIC are taxed at 19%, compared to most individuals and trustees who pay up to 28%. Extraction of profits from the company can be made tax efficiently according to each shareholder’s personal circumstances. Shareholders only pay tax when the FIC distributes income so allowing profits to be retained in the company until required and perhaps taken at retirement when the individual’s personal tax rate may be lower.
Any investment gains and income could be paid into a pension plan for the benefit of the shareholders.