With the end of the tax year fast approaching, many individuals will have been considering further funding their pensions and ISAs, looking to utilise the allowances available to them by taking advantage of the tax relief on pension contributions and the protection from taxation on profits and income within an ISA.
In addition to these, there are other allowances available to make use of, such as:
- Dividend Tax Allowance (£2,000)
- Capital Gains Tax Allowance (£12,300)
- Personal Savings Allowance (£1,000 for Basic Rate Tax payers, £500 for Higher Rate Tax payers)
- Starting rate for savings (£5,000 for savings interest provided other income is less than £12,570, tapering away when other income reaches £17,570)
If I’ve taken advantage of all the above, what else can I do?
The government aims to incentivise investing in specific products which typically hold young or qualifying UK companies and offer generous tax reliefs for doing so. It should be noted, however, that these investments are usually seen as higher risk, and we would advocate seeking professional financial advice before investing in such. Outlined below are a number of products that we have experience in dealing with, to assist clients mitigating their tax liabilities.
Venture Capital Trust (VCT)
VCTs were introduced by the government on 6th April 1995 to encourage people to invest in smaller UK companies whose shares are not listed on the main stock exchange. VCTs are themselves listed companies, operate as ‘pooled’ funds and are run by a fund manager.
There is a maximum investment amount of £200,000 in any one tax year to receive the reliefs, and income tax relief of 30% of the investment amount is available to offset any income tax liability. Well established VCTs also aim to pay regular dividends (free of tax) and there is no Capital Gains Tax payable upon disposal of shares in VCTs .
Examples of successful companies that have been funded in part by VCTs include Secret Escapes, Zoopla, Cazoo, Depop, Graze and Five Guys (UK).
Enterprise Investment Scheme (EIS)
The government introduced Enterprise Investment Schemes (EIS) in 1994 also to encourage people to invest in smaller companies. They are designed to help smaller, higher-risk companies to raise finance, by offering a range of tax reliefs to investors who purchase new shares in those companies.
EIS investments are carried out by an EIS Investment Manager into individual companies, rather than a ‘pooled’ fund like VCTs and, as such, are typically investing into younger, smaller companies. To incentivise these higher risk investments, with a maximum of £1,000,000 a year in reliefs, the government inducements are even more generous than with VCTs. These include:
- Income tax relief of 30% of the investment amount (can also be carried back one year)
- No Capital Gains Tax on growth
- Deferral of capital gains where the realised gain (3 years before, or 1 year after) is invested into the EIS
- May also qualify for inheritance tax relief
- Loss relief where EIS investments fail
Business Relief (formerly Business Property Relief)
VCTs and EISs offer tax incentives to be used over an investors lifetime, but it is also worth considering Inheritance Tax (IHT) and reducing the value of your estate for your beneficiaries.
Most options to reduce an IHT liability generally involve making gifts to individuals or to a Trust, thereby restricting ability to access the money should it be needed. There is, however, a tax incentive for holding shares in a business or investment company that hold assets that qualify for Business Relief.
Business Relief was introduced as part of the 1976 Finance Act and was originally created to allow small businesses to be passed down through generations without incurring an inheritance tax liability (and by effect, sometimes needing to close the business). Over the years, the scope of Business Relief has been widened to include investments in certain types of unquoted companies (not listed on the main stock market) to encourage investment into this area, and qualifying companies held on the Alternate Investment Market (AIM).
Once assets qualifying for Business Relief are held for two years, they are exempt from IHT (providing they are still held at the time of death). These assets are still part of the estate, so can sold and accessed if required.
As well as AIM strategies, typical underlying assets of specialist investment companies include:
- Wind farms
- Solar Farms
- Other low carbon energy generation and infrastructure
- Lending and leasing strategies – government contracts, SMEs and property development
- Healthcare, including care homes, ambulances, medical equipment and hospital facilities
How can MHA Caves help?
Given our extensive investment experience, helping people plan financially with their current objectives and future goals in mind, and navigating the ever-changing taxation rules, you may find it useful to have a discussion with us about your financial circumstances. Please call on 01604 621421 and ask to speak to one of our financial advisers.
MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715. Tax and Estate Planning services are not regulated by the FCA.
Key Risks: Past performance is not a guide to future performance. The value of an investment and the income generated from it can go down as well as up, and is not guaranteed, therefore you may not get back the amount originally invested. Investment markets and conditions can change rapidly, along with tax legislation. Investments should always be considered long term.
This communication is for general information only and is not intended to be individual product/investment advice, tax or legal advice. The views expressed in this article are those of MHA Caves Wealth and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. You are recommended to seek professional regulated advice before taking any action.
For more information visit www.mhacaves.co.uk or call 01604 621421.