1. Pay the maximum into your ISAs
UK residents aged 18+ can invest up to £15,240 each and parents can fund a junior ISA or child trust fund with up to £4,080 per child – making a total of £38,640 for a family of four before 6 April 2017.
If you have adult children who are planning to buy a home, it would make sense to gift funds to them so that they can invest in the new help-to-buy ISA. This is available to first time buyers for a four year period. Individuals aged 16 or over will be able to save up to £200 per month, to which the Government will add a 25% tax-free bonus, from a minimum of £400 up to a maximum amount of £3,000 on £12,000 of savings.
Income and capital gains from ISAs are tax free and withdrawals from adult ISAs do not affect tax relief. Why wait until March?
2. Invest in seed enterprise investment schemes
Investing in start-up enterprises qualifying for the SEIS is often thought to carry even more risk than EIS and VCT investments but it is now possible to obtain substantial tax relief to offset a large part of any potential losses. An individual can invest up to £100,000 in such companies in a tax year and claim income tax relief at 50% irrespective of his or her marginal rate of tax.
In addition, to the extent that you did not use up the £100,000 investment limit for 2015/16, an investment made in 2016/17 can be carried back and relieved as if it was made in 2015/16.
No matter when the investment is made, should a loss eventually be made on the investment, this can be claimed against income in a later year when the shares become worthless (although loss relief is reduced by the tax relief given in the year of investment).
SEIS investments are not regulated by the Financial Conduct Authority, so should only be considered by experienced business owners and investors practiced at making direct investments.
3. Invest in your employer
If your employer offers a share scheme there are usually price discounts and tax breaks for taking part. Where you can participate each year, plan carefully to use annual contribution limits and manage share purchases so that there is a steady flow of potential share sales in future tax years allowing you to maximise use of your annual capital gains exemption.
Shares acquired under share incentive plans (SIPs), or sharesave (SAYE) schemes have minimum holding periods. For SIPs, employees can contribute up to £3,600 a year from gross pay, saving tax and NIC. For SAYE schemes, the limit is £500 a month from net pay.
Share sales after the holding periods are only subject to CGT, not PAYE/NIC. An income tax liability can sometimes arise when enterprise management incentive (EMI) options are granted but not with a company share option plan (CSOP) - although there is a minimum three year holding period for CSOP options. Both allow share purchases at a future date at a price agreed now.
Gains made on selling shares after exercising options are only subject to CGT: for EMI shares, this may be at 10% if they qualify for entrepreneurs’ relief.
It may not be possible to hold such shares in an ISA so any dividends received on the holdings will be taxable. However, from April 2016 onwards, a new dividend nil rate band applies so that the first £5,000 of dividend income is not taxed.
Taking professional investment advice before entering such schemes is important.
Legal advice will also be necessary for the employee shareholder scheme, as employees must give up some employment rights (eg unfair dismissal, statutory redundancy pay, etc) in return for shares with capital gains tax advantages. These advantages are limited to an exemption for the first £100,000 of lifetime gains made on qualifying shares under agreements entered into after 16 March 2016.
4. Invest in enterprise investment schemes
Investments made in qualifying companies (certain companies listed on AIM or that are unlisted) may qualify for income tax relief and EIS shares may be exempt from CGT on disposal.
Such investments are often thought to carry a comparatively high risk and the tax reliefs are intended to offer some compensation for that risk.
Investments in qualifying EIS companies in 2016/17 attract income tax relief at 30% on a maximum annual investment of up to £1 million for qualifying individuals - spouses and civil partners each have individual investment entitlements.
Relief from CGT is available where disposal proceeds are reinvested in a company qualifying for EIS deferral relief.
The original gain is frozen until the EIS shares are sold. Any further gain made on the qualifying EIS shares is exempt provided they have been held for a minimum period of three years.
EIS investments remain higher risk than many other choices but there is now a wide range of sector options available in this maturing market (including media, green energy, leisure and wine).
These investments are not regulated by the Financial Conduct Authority so should only be considered by experienced business owners and investors practiced at making direct investments
5. Invest in venture capital trusts
Buying units in venture capital trusts (VCTs) is higher risk than many other investment choices as VCTs are required to invest in smaller companies that are not fully listed, however, they offer a range of tax benefits. Income tax relief at 30% is available on qualifying investments of up to £200,000 for 2016/17 and dividends received from the units are tax free. In addition, the VCT can buy and sell investments without suffering CGT within the trust and there is no CGT payable on any gain made when you sell the VCT units.
6. Invest in small companies via crowdfunding
The Government announced the introduction of Innovative Finance ISAs (IFISAs) in the 2015 Summer Budget to have effect from November 2016. IFISA’s allow individuals to invest in small businesses via a peer-to-peer lending arrangement that is held in an ISA wrapper. Any income or gains generated within the IFISA are tax free.
Contributions to an IFISA will count towards your overall annual ISA contribution allowance and the maximum contribution is, therefore, £15,240 in 2016/17.
7. Make a community investment
Investments, by way of share purchase in, or loans to, an accredited Community Development Finance Institution (CDFI) can qualify for community investment tax relief.
Relief is given at 5% of the investment for the year of the investment and the following four years – 25% relief in total. There are a number of qualifying conditions but the most important is that the investment must be held for at least five years.
CDFIs are set up to provide finance to enterprises (both profit seeking and non-profit seeking) within disadvantaged communities so such investments should be regarded as high risk. However, if losses are made they can be claimed against your other income in the year they are crystallised (and are not subject to the usual loss capping rules).
Any income arising from the investment is taxable but, from April 2016 onwards, a new dividend nil rate band applies so that the first £5,000 of dividend income from shares is not taxed.
8. Invest in a social enterprise
Investing in a social enterprise, by buying shares in special types of company or lending to certain organisations, attracts significant social investment tax reliefs (SITR). Qualifying entities include a community interest company, a company that is an accredited 'social impact' contractor, a community benefit society or a charity. There are a number of qualifying conditions to be met by the social enterprise which can restrict the organisations which may be invested in under these rules, including a limit on the size of the enterprise. There are also conditions which must be met by the investor, eg retaining the investment for at least three years.
Investments of up to £1 million per year can qualify for income tax relief at 30% although currently there are smaller limits on how much money an individual social enterprise can raise so a large investment would need to be spread across a number of social enterprises. The relief can be claimed for the year of investment or carried back to the prior tax year. Relief from CGT is also available where disposal proceeds are reinvested in a social enterprise.
A gain made on disposal of any asset between 6 April 2014 and 5 April 2019 can be deferred by reinvesting it in a social enterprise in any period from one year before to three years after it arose.
The original gain is frozen until the social enterprise investment is sold, repaid, redeemed or ceases to qualify for the income tax relief. If the social investment is sold more than three years after purchase, a gain on sale of the social investment itself is exempt, but any frozen gain becomes chargeable. Where the investment is in the shares of a social enterprise company, as the company must be an unlisted one, it is possible that the shares will qualify for 100% business property relief from inheritance tax once held for two years. Social enterprise investments are new and may be considered as high risk and low return as an investment. Investors' motivations for making such investments will be more akin to making a charitable gift. However, if your intention is to help a charity or social business with funds, it may be tax-efficient to do it through a social investment if capital gains tax deferral at 20%, income tax relief at 30% and exemption from inheritance tax (in the case of shares) can be claimed. By comparison, the maximum relief for gift aid payments is 45% and there is no residual asset.
9. Think about wine, wheels and woodlands
There are a number of wider classes of investment assets that have specific tax advantages and should be considered if you already have a diversified investment portfolio. For example, personal motor vehicles are exempt from CGT so investing in classic and vintage cars can yield tax free gains. Equally, wine is regarded as a wasting asset that is tax exempt, so again, shrewd investments can yield tax free profits if a vintage gains in value. However, in both cases, any losses you make cannot be set against other gains. Investment in woodlands can also be tax-efficient but is clearly for the longer term. There is no upfront income tax relief for the investment but if you have realised capital gains, these can be reinvested in woodlands and the gain rolled over until the land is sold. Income from timber sales is tax free, and the value of the investment can qualify for 100% relief from IHT. If you sell the whole woodland, only the land element of any capital gain is taxable, not the increase in value of the timber.
10. Spread betting
Spread betting is a way to speculate on short term movements in to investment markets. You can bet on whether you think an investment market will rise or fall but, because you are not buying the underlying asset (eg shares), it is effectively a form of derivatives trading. As with all gambling, any winnings are tax free but there is no tax relief for any losses made.
With no underlying assets, spread bets are generally highly geared and are associated with high risk and high levels of return. As the bets are also based on the values of traded investments they should only be considered by experienced investors in the context of a wider investment portfolio.
11. Life assurance bonds
Insurance backed bonds provided by major insurance companies offer relatively secure returns to investors (depending on the underlying investments). They have the added tax advantage that 5% of the original capital invested can be withdrawn each year tax free.
After such withdrawals reach 100% of the original capital (ie after 20 years), income tax is payable on further withdrawals or on surrender of the policy.
While commissions, management costs and basic rate tax charges within the bond must be considered, individuals whose level of income means that they will lose their personal allowance and pay 45% income tax may now find the 5% tax free withdrawals facility particularly attractive.
Some regular premium policies which run for ten years or more can qualify for full income tax exemption on the gains accrued. However, since 6 April 2013, investment into such qualifying policies has been limited to £3,600 a year for all arrangements set up after 21 March 2012.
Any amounts invested in new policies that are in excess of the annual limit will not qualify for the favourable tax treatment. Increases to existing policy premiums will be classed as creating a new non-qualifying policy but, if you have a pre-21 March 2012 policy, it should be advantageous to keep the policy going until the existing maturity date.
12. Protect family wealth using a family investment company
Operating an investment company may be attractive in some circumstances 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. The most appropriate structure will depend on the families circumstances and objectives.
By exchanging capital for shares in the company and making loans to it, the family directors can then invest as appropriate. Income and capital gains will be taxed at the main corporation tax rate (20% in 2016/17 and reducing to 17% by 2020/21) which is lower than the 28/45% rates paid for income/gains received personally or by a trust. In addition, various corporate tax exemptions may be available. Of course, when funds are later paid out by the company, dividend and interest payments would be taxed on recipients as normal although loan capital repayments would not be taxable.
Where shares in an investment company are held by the next generation, dividends could be paid to fund university education (after the personal allowances and dividend exemption (£5,000) these will be taxed at a maximum of 7.5% in the hands of a basic rate taxpayer). Where a parent sets up the company, dividends paid to children before they reach age 18 are taxed on the parent under the settlement rules.
13. Offshore bonds
Offshore life assurance bonds allow income to accumulate virtually tax free until they are disposed of (when they are taxed in full – ie at a maximum of 45%). As with UK bonds, 5% of the original capital invested can be withdrawn each year tax free for up to 20 years, but there is (currently) no annual investment limit. While the rate of CGT has dropped to 20%, alternative collective investments may be more attractive for short-term investment.
However, offshore life assurance bonds offer the flexibility to defer tax into a year when other income is lower, or until a year when income losses are available to offset the profits, or a year when you are not tax resident in the UK.
Comparison table for key tax advantaged investments
|MAIN CONDITIONS FOR TAX RELIEFS||ISA||EIS - FULL RELIEFS||EIS DEFERRAL ONLY||VCT||SEIS|
|Individual can invest||Yes||Yes||Yes||Yes||Yes|
|Income tax credit - % of cost||25% credit (total of £3,000) for help-to-buy ISAs)||30%||n/a||30%||50%|
|Share subscription limit per tax year||£15,240 for £4,080 for under 18s||£1m||Unlimited||£200,000||£100,000|
|Cash deposit limit per tax year||£15,240 for £4,080 for under 18s||n/a||n/a||n/a||n/a|
|Tax free increase in value of shares||Yes||Yes||No||Yes||Yes|
|Dividends free of income tax||Yes||No||No||Yes||No|
|Deferral/exemption from CGT for gains on other assets realised in same period as investment||Exemption||Deferral||Deferral||No||Exemption for 50% of gains only|
|Time limit for carry back of CGT deferral relief to previous disposals||n/a||Shares issued up to 12 months before / 3 years after gain||Shares issued up to 12 months before / 3 years after gain||n/a||1 year|
|Minimum qualifying period for income tax and CGT deferral/exemption||n/a||3 years||3 years||5 years||3 years|
|Loss relief on investment||No||Yes||Yes||No||Yes|
|IHT business property relief on shares after two years' ownership||Depends on investments||Yes||Yes||No||Yes|
|Direct or indirect provision of finance||Direct||Direct||Direct||Indirect||Direct|
|Gross asset limits||n/a||£15m-£16m||£15m-£16m||£15m-£16m||£200,000|
|Maximum number of employees||n/a||< 250||< 250||< 250*||< 25|
|Investor's maximum holding||n/a||30% of qualifying company||100% of qualifying company||Small % of VCT||30% of qualifying company|
|Limit on money received by enterprise/company||n/a||£5m pa||£5m pa||£5m pa||£150,000|
* 500 if a qualifying 'knowledge intensive company'