Tax Advantaged Investments – 2018/19 Tax Year End
In this blog mini-series, our Tax Partner, Terry Smith CTA ATT, provides his thoughts on a number of matters that should be considered prior to 5th April 2019. As well as confirming the details of allowances and forthcoming legislative changes, Terry also offers some advice to help clients make informed and timely decisions.
In this post, Terry provides an update and actions relating to Tax Advantaged Investments
Other topics in this blog series:
- Individual Savings Accounts (ISAs)
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:
• property 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 maximum cash bonus savers can receive is £3,000 (if £12,000 has been saved).
• 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
- VCT, EIS & SEIS
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. For 2018/19, the maximum qualifying investment is £100,000. Income tax relief is given at the rate of 50% of the sum invested, and relief may be given against tax in 2017/18 or 2018/19. Both EIS and SEIS shares are normally exempt from capital gains tax (CGT) and 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 (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 incentives:-
• Up front 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 for, and not for shares acquired from another shareholder.
• Dividends received on VCT shares are income tax free (including shares acquired from another holder).
• CGT exemption applies on the VCT shares (including shares acquired from another holder).
Note that gains from other assets cannot be rolled into purchases of VCT shares. Please note that the rules changes to SEIS and EIS affecting the annual investment limit and investments which are intended to provide ‘capital preservation’ shall apply on the same basis to VCT investments.
Prudent utilisation of the reliefs associated with tax favoured investments as part of a balanced portfolio can make a big difference to future investment returns, but it is important to consider the risks associated with them and it is essential that professional advice is sought
- Family Investment Companies (FIC)
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 IT 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% FICs still benefit from indexation allowance which takes account of inflation when calculating capital gains.
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.
If you are seeking to preserve family wealth within a controlled family environment and/or wish to consider introducing the next generation into the decision making about investments made, please speak to us about how a FIC could benefit you.
All the articles in this blog series have been written to provide general advice that relates to all our clients. If you have questions regarding your own personal or commercial circumstances, please contact a member of the team today.
The tax year ends on 5th April, but please be aware that some changes may come into effect on 1st April. Plan ahead.