Tax-Efficient Investments

By Lanying Burley, Investment Director at Smith & Williamson Investment Management Ltd

With top tax rates at 50% and tax thresholds reducing, you may feel that your pips are squeaking. If so, this article focuses on how you can invest tax efficiently in today’s high-tax environment.

VCTs and EISs

Venture Capital Trusts (VCTs) are tax-favoured, quoted investments that provide funding to qualifying trading businesses. Individuals can invest up to £200,000 per tax year in a VCT and benefit from 30% income tax relief, with a minimum holding period of five years. Dividends are tax-free, subject only to the loss of the dividend tax credit, and there is no capital gains tax (CGT) if the VCT is sold after this time.

The Enterprise Investment Scheme (EIS) applies to similar types of investment but through an unquoted structure. Investors acquire shares in individual businesses or through specialist EIS funds, gaining income tax relief of 30% on any qualifying investments made. Investments of up to £500,000 can be made on an annual basis, with this limit increasing to £1m in April 2012. EIS investors can also benefit from CGT deferral on the sale of other assets.

Altogether, VCT and EIS investments offer a tasty cocktail of tax breaks, but they are not without risk.

Self-Invested Personal Pension

A Self-Invested Personal Pension (SIPP) is a tax-efficient shelter or ‘wrapper’ that allows you to keep tabs on your pension. You can exercise control over the underlying investments and manage your investment preferences or restrictions. With tax relief on contributions at your marginal rate (NB- there are limits), tax-free growth, some tax-free cash and a pension at the end of the day, these are popular and beneficial arrangements.

Individual Savings Account

An Individual Savings Account (ISA) is well worth considering — assuming you don’t have one already. The limit per individual is £10,680 pa for stocks and shares ISAs, while cash ISAs have a lower limit of £5,430 pa.

ISAs are CGT and income tax free, subject only to the loss of the dividend tax credit. Unlike pensions, which have age and other restrictions, ISAs can be cashed in at any time.

National Savings

National Savings include Premium Bonds, National Savings Certificates and Children’s Bonus Bonds. These are tax-free investments that can be cashed in when needed. They are also Treasury-backed, so appropriate for risk-averse investors.

Qualifying investment plans

Qualifying investment plans are regular premium insurance policies that provide an investment and a life assurance element, normally set up for ten years. They can be useful for funding liabilities, e.g. school fees, or topping up pension income in a tax-efficient way.

Offshore investment bonds

Offshore investment bonds are single premium non-qualifying insurance policies that receive special tax treatment. You can make 5% withdrawals without being taxed on underlying income and gains, as well as benefiting from ‘gross roll-up’ of the underlying investment funds.

To view part 1, please see: Investing Your Wealth In The Current Climate

Risk warning- Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back in total the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.

Disclaimer - By necessity, this article can only provide a short overview and it is essential to seek professional advice before applying its contents. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Smith & Williamson Investment Management Limited Authorised and regulated by the Financial Services Authority.

Lanying Burley is an Investment Director at Smith & Williamson Investment Management Ltd. For more information on tax-efficient investments, call her on 020 7131 4000 or email lanying.burley@smith.williamson.co.uk.

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