There is a wide range of investments with varying tax treatments. We take a look at some of the main ones that have special tax rules.
When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the long and short term. An investment strategy based purely on saving tax is not advisable.
Individual Savings Accounts
Individual Savings Accounts (ISAs) provide an income tax and capital gains tax free form of investment. The maximum investment limits are set for each tax year, therefore to take advantage of the limits available for 2010/11 the investment(s) must be made by 5 April 2011.
An individual aged 18 or over may invest in one cash ISA and one stocks and shares ISA per tax year but limits apply.
A cash ISA allows you to invest up to £5,100 with one provider only, in any one tax year.
A stocks and shares ISA allows you the option to invest up to £10,200 (per tax year) with one provider in any one tax year.
However, if you want to invest in both then the stocks and shares ISA investment is capped so that overall you do not exceed the £10,200 limit.
16 and 17 year olds are able to open a cash ISA only.
Junior ISAs should become available in autumn 2011.
National Savings and Investment bank (NS&I) products are taxed in a variety of ways. Some, such as National Savings Certificates, are tax-free.
Single premium life assurance bonds and ‘roll up’ funds provide a useful means of deferring income into a subsequent period when it may be taxed at a lower rate.
The Enterprise Investment Scheme (EIS) allows income tax relief at 20% on new equity investment (in qualifying unquoted trading companies) of up to £500,000 per tax year. Capital Gains Tax (CGT) exemption is given on qualifying shares held for at least three years.
Capital gains realised on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred where gains are reinvested in EIS shares. A Venture Capital Trust (VCT) invests in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends (although the tax credits are not repayable) and on any capital gains arising from disposal of shares in the VCT. Income tax relief currently at 30% is available on subscriptions for VCT shares up to £200,000 per tax year so long as the shares are held for at least five years.
Second hand endowment policies (SHEPs) can be attractive. Purchasing a SHEP will give an initial cost plus subsequent premiums payable to maturity. On maturity a capital gain arises less the purchase price and premiums paid. It may be possible for each member of a family to use their CGT annual exemption in this way.
Finally, review your borrowings. Full tax relief is given on funds borrowed for business purposes.