There is a wide range of investments with varying tax treatments. We take a look at some of the main ones that have 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 year, therefore to take advantage of the limits available for 2012/13 the investment(s) must be made by 5 April 2013. An individual aged 18 or over may invest in one cash ISA and one stocks and shares ISA per tax year but limits apply.
A cash ISA allows you to invest up to £5,640 with one provider only, in one tax year. A stocks and shares ISA allows you the option to invest £11,280 (per tax year) with one provider in any one tax year.
However, if you want to invest in both then the stocks and shares ISA investment is capped so that overall you do not exceed the £11,280 limit.
16 – 17 year olds are able not to open an adult cash ISA in 2012/13 but can also have a Junior ISA account. This means a combined maximum investment of £9,240 (£5,640 + £3,600) is possible for 2012/13.
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 new Seed (EIS) allow income tax relief on new equity investment (in qualifying unquoted trading companies). For EIS that is 30% relief on investments of up to £1m in 2012/13 and for Seed EIS up to 50% relief on £100,000. Capital Gains Tax (CGT) exemption is given on qualifying shares held for at least three years.
Capital gains realized on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred where gains are reinvested in EIS shares.
A Venture Capital Trust (VCT) invests in the shares on 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 currently at 30% is available on subscriptions for VCT shares up to £200,000 per tax years so long as the shares are held at least five years.
Second hand endowment policies (SHEPs) can be attractive. Purchasing a SHEP will give an initial cost plus subsequent premiums payable to maturity. On maturity a capital gain arises less the purchase price and premiums paid. It may be possible for each member of a family to use their CGT annual exemption in this way.
Finally, review your borrowings. Full tax relief is given on funds borrowed for business purposes.