ISAs and Tax Efficient Investments Return to all services
It makes sense to invest as tax efficiently as possible. Dupree Wealth Planning can help you do this taking into account your circumstances, objectives and attitude to risk.
Individual Savings Accounts (“ISAs”)
An ISA is simply a savings vehicle that you never pay tax on. It is possible to save up to a maximum of £20,000 in the 2018-2019 Tax Year (this is known as the “full allowance”) – it may be possible for this to be in a Cash ISA, a Stocks & Shares ISA, a Lifetime ISA, a Help to Buy ISA, an Innovative Finance ISA or a mixture of them all.
Cash ISAs and Stocks & Shares ISAs
To be eligible to open these a person needs to be a UK Resident (or a Crown Servant or their spouse). The minimum age for a Cash ISA is 16 and age 18 for a Stocks & Shares ISA.
Cash ISAs allow for any interest to be tax free. With Stocks & Shares ISAs any capital growth is tax free – aside from the 10% tax credit deducted from dividend payments, dividend payments are not liable to tax. It is worth noting that although Stocks & Shares ISAs can hold cash the interest earned will be taxed at 20%.
The full allowance can be invested totally in a Cash ISA, totally in a Stocks & Shares ISA or any combination of the two.
Lifetime ISAs can be opened by people age 18 to 40.
The maximum is £4,000 per year and the Government will add up to 25% as a bonus.
You can have a Cash ISA and/or a Stocks & Shares ISA as well but the Lifetime ISA amount (including the Govt Bonus) comes within the annual ISA Allowance. For example, if £5000 In Lifetime ISA (£4,000 + 25%) then the remaining ISA Allowance is £15,000 (£20,000 in total).
Innovative Finance ISAs
This is a means of lending money to other people with any interest paid being tax free.
The lending can be in various forms including peer-to-peer lending, lending to businesses, property and crowdfunding.
Junior Individual Savings Accounts
If you have children under the age of 18 that live in the UK and would like to invest tax efficiently for their future, Junior ISAs are an option. They work in a similar way to NISAs with investment allowed in stocks and shares or cash. The 2016/17 contribution limit is £9,000. Your child can start to manage the investment from age 16, but can't access the funds until they are 18 years old. For children between the ages of 16 and 18 the rules allow them to hold both a Junior ISA and NISA.
Business Property Relief Investments
An area of growing interest is Business Property Relief (BPR) investments. BPR was designed to allow family businesses to be passed onto future generations free of inheritance tax (IHT) as long as the business had been held for at least two years.
The investments eligible for this relief, however, go beyond family businesses. It includes an interest in a business and shares in unlisted companies, including some of the companies listed on the Alternative Investment Market (AIM). This has led to BPR schemes being set up by professional fund managers. The schemes vary and offer varying risk profiles. A BPR scheme may be of interest as a way of mitigating IHT on death.
Enterprise Investment Scheme and Seed Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) was set up by the Government to encourage private investment into smaller, higher-risk unquoted companies. It encourages investors by providing a number of tax incentives including Capital Gains Tax (CGT) reinvestment relief on investments made into a scheme, income tax relief and an exemption from CGT on any gains made.
The Seed Enterprise Investment Schemes (SEIS) is a similar scheme, designed to help small start-up companies raise equity. The Government recognises that is harder for new companies to raise funds so the income tax relief available with a SEIS is higher than that available with an EIS. Both schemes qualify for Business Property Relief so investments can be passed on IHT free after two years.
Whilst the tax benefits are attractive they are subject to certain conditions being met e.g. the income tax relief is capped and subject to the shares in both schemes being held for three years. These are also high risk investments as there is the possibility of the business invested in failing. It may also be very difficult to dispose of the shares as the market is likely to be very illiquid.
Venture Capital Trusts
VCTs are companies that are listed on the stock market that are run by a fund manager. The fund manager invests in small, higher risk trading companies that are not listed on the stock market. They receive tax advantages because the Government wants to attract investment into these smaller companies. An advantage of VCTs is that because they invest in a number of companies, investment risk is spread.
Shares in VCTs are bought and sold in the same way as all other listed shares. However, to benefit from income tax relief on the investment, new shares issued by the VCT must be bought. There are further tax benefits with the payment of dividends and any gains made are exempt from CGT.
Whilst the tax benefits are attractive they are subject to certain conditions being met e.g. the income tax relief is capped and subject to the shares being held for five years. Also as income tax relief is only given on the issue of new shares it is likely that when it comes to selling, demand will be weak. It is worth bearing in mind losses are not allowable for CGT purposes.
This page has provided a very brief summary of some the tax efficient investments we are able to advise upon. If you are interested in investing in any of them it is important to understand how they work in detail and the risks involved before any investment is made.