Investments - are yours tax efficient?
There are a wide range of investments available and we consider some of the main ones with special tax rules.
When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the long and short term. An investment strategy based purely on saving tax is not advisable.
Individual Savings Accounts
Individual Savings Accounts (ISAs) provide an income tax and capital gains tax free form of investment. The maximum investment limits are set for each tax year, therefore to take advantage of the limits available for 2014/15 the investment(s) must be made by 5 April 2015. An individual aged 18 or over may invest in one cash and one stocks and shares ISA per tax year but limits apply.
From 1 July 2014 ISAs were reformed into a simpler product, the New Individual Savings Accounts (NISA) and all ISAs become NISAs. Savers are able to subscribe the full amount into a cash NISA if they choose to. They are also be able to transfer amounts between stocks and shares NISAs and cash NISAs.
The total annual subscription limit for ISAs for 2014/15 was originally set at £11,880 of which up to £5,940 could be placed in a cash ISA. This limit applied to investments made between 6 April and 30 June 2014. From 1 July 2014 a NISA allows you to invest up to £15,000 (£15,240) in a tax year. Individuals who have already invested £11,880 can therefore top up to £15,000 by 5 April 2015.
National Savings and Investment bank (NS&I) products are taxed in a variety of ways. Some, such as National Savings Certificates, are tax free.
Single premium life assurance bonds and 'roll up' funds provide a useful means of deferring income into a subsequent period when it may be taxed at a lower rate.
Both the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) allow income tax relief on new equity investment (in qualifying unquoted trading companies). For EIS that is 30% relief on investments of up to £1 million and for SEIS up to 50% relief on £100,000. CGT exemption is given on qualifying shares held for at least three years.
Capital gains realised on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred where gains are reinvested in EIS shares.
A capital gain may be relieved potentially saving up to 14% CGT where a qualifying investment is made in the SEIS.
A Venture Capital Trust (VCT) invests in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends (although the tax credits are not repayable) and on any capital gains arising from disposal of shares in the VCT. Income tax relief at 30% is available on subscriptions for VCT shares up to £200,000 per tax year so long as the shares are held for at least five years.
Finally, review your borrowings. Full tax relief is given on funds borrowed for business purposes.