- 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?
- Consider investing in Seed Enterprise Investment Schemes (SEIS)
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.
- 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 maximize 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 (e.g. 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.
- Consider investing in Enterprise Investment Schemes (EIS)
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.
- Consider investing in Venture Capital Trusts (VCT)
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.
- 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 (i.e. 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.
- 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.
- Offshore Bonds
Offshore life assurance bonds allow income to accumulate virtually tax free until they are disposed of (when they are taxed in full – i.e. 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.
As always we would be delighted to discuss any of the above with you.