Tax efficient investments
- Lifetime ISAs
- Help to save
- Enterprise investment scheme (EIS), seed enterprise investment scheme (SEIS), venture capital trusts (VCTs)
- Pension contributions
- 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.
- The limits for an ISA investment for 2017/18 is £20,000.
Help to save
- This scheme is available only to low income households from 2018.
- Savings must be made for a fixed two year period. An amount of up to £50 per month will secure a government exit bonus of 50%.
- The investment can be rolled over for a further two years, at which point the amount saved would be £2,400 with a government bonus of £1,200.
- Funds withdrawn can be used for any purpose.
Enterprise investment scheme (EIS) and venture capital trusts (VCTs)
- These two schemes allow ongoing tax relief on investments that are chanelled 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, and investments can be carried back by up to one year provided the limit in the previous year was not reached.
- EIS shares are exempt from capital gains tax once they have been held 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.
- With SEIS the investor receives income tax relief of 50% of the cost of the shares regardless of their marginal rate. Relief is available provided the company meets the SEIS requirements. Investors do not need to be UK resident. Relief is available for those with a shareholding that does not exceed 30% in such companies and can include directors investing in their companies. The relief is limited to £100,000 per investor, with unused annual amounts able to be carried back to the previous year.
- 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 £250,000 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.
- Individual investors can invest up to £1,000,000 and can invest in more than one social enterprise. This is independent of any investments under the Seed Enterprise Investment Scheme and the Enterprise Investment Scheme which are subject to their own annual investment limits. Individuals making an eligible investment can deduct 30% of the cost of their investment from their income tax liability, either for the tax year in which the investment is made or the previous tax year. The investment must be held for a minimum period of 3 years for the relief to be retained.
- If individuals have chargeable gains in that tax year, they can also defer their capital gains tax (CGT) liability if they invest their gain in a qualifying social investment. Tax will instead be payable when the social investment is sold or redeemed. They also pay no CGT on any gain on the investment itself, but they must pay income tax in the normal way on any dividends or interest on the investment.
- 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 in a stakeholder pension 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 return.