Tax-efficient investing

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ISAs and pensions are the most popular options for people saving for their futures. However, if you are an experienced investor with a significant portfolio of assets, there are other tax-advantaged products which may be appropriate. Known as ‘tax-led investments’, these include Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS).

Tax-led investments offer a range of tax advantages, although these are subject to change, and will also depend on your individual circumstances. It’s important to remember that the value of such investments may go down as well as up and you may not get back the full amount you invest.

Here we give a brief overview of VCTs and the EIS. Due to the risks involved it’s very important to seek qualified financial advice before investing. We have links to local independent advisors with a great deal of expertise in this area and who only recommend tax-led investments that have passed their rigorous and robust research process.

Venture Capital Trusts

VCTs were introduced to stimulate investment in small businesses. They operate in a similar way to Investment Trusts – essentially they are ‘pooled’ funds which invest in a range of companies. Generous tax incentives are offered in order to attract investment:

  • Income tax relief of 30% is currently given on investments up to £200,000 (so if you invest £50,000 you can potentially receive £15,000 in tax relief)
  • There’s no income tax to pay on the dividends you receive
  • You pay no capital gains tax when you sell your investment (but any loss is not allowable).

Some conditions apply to claiming these reliefs. Firstly, income tax relief can only be claimed on income tax paid in the year of investment. You must also hold the VCT for at least five years or the tax rebate must be repaid.

Because VCTs invest in very small companies they are high risk investments.

The Enterprise Investment Scheme

This scheme was also introduced to encourage investment in small UK companies. The difference with an EIS investment is that it is a direct investment into a single qualifying company.

Like VCTs, the tax incentives are quite generous:

  • Income tax relief of 30% is currently given on investments up to £1,000,000
  • There is no capital gains tax to pay when you sell your investment
  • After two years an EIS investment can be free from inheritance tax
  • Tax on a capital gain can be deferred if this gain is invested in the scheme
  • Some relief can potentially be claimed if shares are sold at a loss.

Again, there are conditions applying to these reliefs. Firstly, income tax relief can only be claimed if you have paid sufficient income tax, although a carry back rule does allow you to count income tax paid in the previous tax year in addition to the current tax year. You must also hold an investment for three years to retain the income tax rebate and for it to be free from any capital gains tax charge.

Because an EIS investment is a holding in a single very small company any investment is very high risk.

If you want to find out more about tax-led investments please give Sue Stephens a call.