When considering investment opportunities, let’s face it, tax efficiency probably isn’t at the top of your checklist. Your primary consideration is probably the safety of the investment and the return it’s likely to generate. However, in this age of austerity, the Government is not offering many fiscal advantages – which makes it all the more important to secure all the opportunities you can to minimise your tax liabilities and make your money work harder. Whether investing for capital growth or to produce income, careful tax planning is essential to ensure you invest in tax efficient assets that suit your risk profile.
For the risk averse – whether you’re saving for a rainy day or perhaps looking to build up a nest egg to cover the kids’ university fees – then you can invest up to £30,000 in premium bonds, £15,000 in savings certificates and £3000 in each issue of Children’s Bonds for children under 16, with all returns being tax free.
However, for the investor who is not afraid of risk, there are several vehicles that you can consider:
Venture Capital Trusts (VCTs)
For those interested in investing in the UK’s small companies, there are some extremely tax-efficient options. VCTs allow you to invest in some of the most entrepreneurial, high-growth companies affording the chance to get “in on the ground floor” of fledgling investment opportunities – but with such dynamism comes inherently high risk and these are long-term speculative investments.
Investors can put up to £200,000 a year in a VCT and receive income tax relief on the entire amount, although they cannot receive more in relief than has been paid in income tax. When the holdings are eventually sold, any gains made are free from capital gains tax (CGT) providing they have been held for more than five years in qualifying companies (if the VCT shares are sold within five years the income tax relief will be withdrawn) Tax relief is available up to 30%, meaning a £100,000 investment might have an effective cost of £70,000 after tax relief. Any dividends received are free from income tax.
There are three main types of VCT: limited life, specialist and generalist. Limited life VCTs tend to be lower risk, looking for an exit typically within five years. Specialist VCTs focus on just one sector, often technology and generalist VCTs invest across a variety of businesses. Performance has been variable, with some VCTs providing good returns to investor, and some still losing money in spite of generous reliefs. Enterprise Investment Schemes (EIS) The tax reliefs available on an EIS are even more generous than those on a VCT although EISs similarly invest in small, start-ups and hence also present a high risk.
The tax relief on an initial investment into an EIS is also 30% but investors can put in between £500 and £1 million, potentially clearing their entire year’s income tax liability. There is also the potential to defer capital gains (CGT) made on a separate investment by reinvesting them into an EIS, if the reinvestment meets certain criteria i.e. disposal of the original asset has to be less than 12 months before the EIS investment or less than 36 months after it. In this way, gains can be deferred until a tax year in which you are not using your CGT allowance, or have retired and are paying lower tax rates.
For the EIS investment itself, no CGT is payable if you sell the shares after three years (assuming the EIS initial income tax relief was given and not withdrawn on those shares). Any losses on EIS shares can be offset against your capital gains or income tax liability in the year of disposal. There are however a number of additional specific criteria attached to EIS
investments – eligible companies have to be worth less than £7 million, and individual investors can only have up to 30% stake in the business (so not necessarily an option for family businesses).
Seed Enterprise Investment Scheme (SEIS)
The Seed Enterprise Investment Scheme (SEIS) has a limited life – five years to 5 April 2017 – but allows investors to
receive 50% income tax relief on the amount invested and up to 28% capital gains tax relief for a limited period. Also if you make a loss on the SEIS shares you can get further income tax relief for that loss – a very attractive proposition, but with some limitations. SEIS can only be used to invest in small companies with an asset value of no more than £200,000 and up to 25 employees), and the investor together with his associates must not own more than 30% of the company. Each company can raise up to £150,000 of investment under SEIS in its lifetime, and each investor can invest up to
£100,000 per tax year.
Evans Entwistle is offering a fixed fee taxation strategy review of your current investment portfolio where we will review the tax efficiency of your investments and advise on ways to minimise your fiscal obligations. We will look at your overall position, including residence and domicile, and will recommend structures which can be used to minimise the impact of income tax, capital gains tax and inheritance tax, taking advantage of onshore as well as offshore structures. Note that Evans Entwistle does not recommend individual products – that is the role of a Financial Advisor, and should you so wish, we can arrange a no obligation meeting with one of our panel advisors.