Take That tax! – Bestinvest’s Jason Hollands takes a closer look at legitimate tax efficient investments13 May 2014
Much has been written in recent days on Take That’s Gary Barlow and band mates, after a court ruled that a scheme they were invested in was set up for tax avoidance purposes.
Tax avoidance schemes are a form of aggressive financial planning which will typically try to exploit legal loopholes and are never approved by HMRC. Use of such schemes will mark you out as a high-risk taxpayer with the HMRC and expose you to considerable scrutiny. The Government and Her Majesty’s Revenue and Customs are strongly committed to cracking down on tax evasion and avoidance.
This type of questionable tax planning needs to be clearly distinguished from several perfectly legitimate, government backed schemes, which allow people to invest in a tax efficient way. Many of these schemes are extremely popular, including ISAs and pensions, while others are less well known. Bestinvest’s Managing Director Jason Hollands takes a closer look at the options available, both for adults and for children.
- ISAs – One of the most popular tax allowances, ISA sales through funds alone reached £2.3 billion for tax year 2013/14; over £1 billion more than 2012/13 tax year according to figures from the Investment Management Association. With the allowance increasing to £15,000 on 1 July 2014 with New ISAs (NISAs), the popularity of the schemes looks set to continue.
While no tax relief is provided on the way in, returns on ISAs will accrue in a tax efficient environment and therefore they should be a cornerstone of a tax efficient savings strategy. Up to 2 million more people are expected to have been drawn into the higher rate tax band by 2015/16 since the start of the Coalition, so it is vital to keep as much of your wealth as you legitimately can away from the hands of the tax man using these precious but flexible allowance.
- Pensions – Pensions have a very favourable tax treatment, offering up-front reliefs that ISAs don’t have (but you are tying your money up until you are at least 55). Currently, these reliefs are de facto at your marginal income tax rate, making them particularly attractive for higher (40%) and additional (45%) tax payers.
Pension contributions are “grossed up” by the government by 20%, so an £8,000 contribution turns into a £10,000 investment. However, those subject to the higher rates can effectively get a further rebate via their tax return as currently pension contributions reduce taxable earnings. In effect a 40% tax payer will get a further 20% benefit and a 45% taxpayer a further 25% benefit on top of the amount the government adds to their contribution. That means a higher rate taxpayer gets a £10k investment for a cost of £6k, and a 45% taxpayer a £10k investment for a cost of £5.5k – this is unrivalled for a main stream investment.
In the past, many people have been put off pensions as a result of poor fund choices, confusing charges and the lack of flexibility on retirement. SIPPs have addressed this lack of choice as they enable savers to invest across a wide range of funds and have removed much of the complexity over charges, while the Chancellor heralded a pensions revolution in his recent Budget, which means no one will have to buy an annuity with their pension pot.
- VCTs – VCTs are specialist investments, targeted at more experienced investors. Investment in a VCT new share offer attracts a 30% income tax rebate, providing you have paid the level of tax being claimed and that you hold the VCT shares for at least five years. For someone in a position to invest the maximum annual allowance of £200k, that’s up to £60k tax credit available. Of course, anyone doing this is likely to have substantial assets already in more mainstream investments. All returns from VCTs are tax free and these can provide attractive dividend income streams for higher rate taxpayers.
- EIS – Companies eligible to receive EIS financing have the same characteristics of those which VCTs invest in; small, UK private companies but whereas VCTs are diversified funds, EIS investment is ploughed directly into these companies. Like a VCT, investment in an EIS carries a 30% income tax credit but you only need to hold the investment for three years, not five. So, the maximum potential relief is £300k on a £1 million of investment each year.
While VCTs tend to generate attractive tax free dividends, EIS investments aim to generate a tax free capital gain. In the event the investment loses money, the investor can elect that the amount of the loss, minus the income tax relief received, is offset against their income tax liability.
EIS can be used as means to defer a capital gains tax liability for individuals who have made a gain on the sale of another asset. By reinvesting the amount of their gain into EIS companies, the tax liability is deferred and only recrystallizes once the EIS shares are sold.
If you have held EIS shares for at least two years and then die, they are eligible for 100% inheritance tax relief, so can be used in estate planning.
- Seed EIS - The Seed EIS scheme is relatively new and is aimed at incentivising investment into small start-ups by business angels. This is clearly aimed at sophisticated investors. Investors can receive 50% tax relief on their investment irrespective of their marginal rate. If they have made a capital gain, they can eliminate this by investing the gain into a Seed EIS and also get the 50% relief. With the top rate of CGT at 28%, for some investors this can add up to 78% tax relief. Of course, failure rates are high for start-ups, hence the huge reliefs on offer.
In addition, it is also worth flagging the tax allowances available for investors with children:
- Junior ISAs / CTFs - If you have children, you may be able to shelter a further amount for them in a Junior ISA (or CTF if they have one). As announced in the Budget, the Junior ISA allowance will increase to £4,000 from 1 July 2014. Junior ISAs provide a valuable means of building up a fund which can be used to support children through a future degree.
- Ends -
Founded in 1986, Bestinvest has grown to become a leading private client investment adviser, looking after £5 billion of assets. We offer a range of investment services from the Online Investment Service for self-directed investors to Investment Advisory and Investment Management services for clients who do not have the time or inclination to manage their own investments.
All of our services are underpinned by rigorous research aimed at identifying those fund managers we believe will deliver long-term superior performance. We also have a team of expert financial planners with nationwide coverage to help clients with their pensions, retirement or Inheritance Tax planning. At Bestinvest, we pride ourselves on offering the highest levels of professionalism and expertise with transparent, competitive prices. We are pleased that our greatest source of new business is from personal referrals from existing clients.
Bestinvest has won numerous awards including Stockbroker of the Year, Low-Cost Sipp Provider of the Year and Self-Select ISA Provider of the Year at The Investors Chronicle and Financial Times Investment Awards 2013. Bestinvest also won UK Wealth Manager of the Year 2013 and Best Wealth Manager for Investments at The Investors Chronicle and the Financial Times Wealth Management Awards 2013.
Headquartered in Mayfair, London, Bestinvest employs more than 200 staff and has an extensive network of regional offices. For further information, please visit: www.bestinvest.co.uk
Tilney is a leading investment and financial planning firm that builds on a heritage of more than 150 years. The Tilney Group operates under the Tilney brand for Investment Management and Financial Planning and Bestinvest for execution-only investing. We look after more than £22 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including Best Fund Platform and Best SIPP Provider at the 2017 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Group employs over 1,000 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.