Tax-efficient investments

 

Some investments have income tax and capital gains tax (CGT) advantages.

 

Individual savings accounts (ISAs)

 

You can invest up to £5,340 in a cash ISA and up to £10,680 in a stocks & shares ISA in 2011/12. The total investment is limited to £10,680 so if you invest, say, £2,000 in a cash ISA, you can only invest £8,680 in a stocks & shares ISA. The annual limits are increased in line with inflation each year. The 2012/13 limits have already been announced at £5,640 and £11,280.

 

ISAs are free of UK tax on investment income and capital gains although, as with other investments, it is not possible to reclaim the tax credits on dividends. There is a choice of investments, including equities and fixed-interest securities.

 

Remember that 16 and 17-year olds can open a cash ISA, so you may wish to provide funds for young relatives to invest. However, the rules effectively prevent you from opening an ISA for your own children. However, parents and others can contribute to a junior ISA for children of any age who do not have a child trust fund. The overall contribution limit is £3,600 a year, and children can have one cash and one stocks & shares junior ISA at a time subject to this limit. Funds are locked in until the child is 18.

 

Enterprise investment scheme (EIS)

 

The EIS gives tax relief for investing in new shares in relatively small qualifying trading companies that are not listed on any Stock Exchange.

 

Income tax relief is given at 30% on up to £500,000 invested in 2011/12.

 

Gains on those shares escape CGT after three years.

 

It is possible to defer CGT on a gain of any size, on the disposal of any asset, by reinvesting in shares that qualify under the EIS. The amount of the gain must actually be reinvested.  An EIS investment can be used to defer gains made up to three years earlier.

 

Seed Enterprise Investment Scheme (SEIS)

 

Individuals will be able to get 50% income tax relief on investments of up to £100,000 a year in start-up companies from 6 April 2012 even if they do not pay the additional tax rate of 50%.  In addition, gains arising on the disposal of other assets during 2012/13 will be exempt from capital gains tax if they are reinvested through the SEIS before 5 April 2013 – giving total tax relief of up to 78%. You might want to defer an EIS investment until after 5 April 2012 to benefit from this new scheme.

 

Venture capital trusts (VCTs)

 

You can obtain income tax relief of 30% by subscribing up to £200,000 for shares in VCTs in 2011/12. Gains are generally exempt from CGT. VCTs are investment trusts that invest in a range of relatively small trading companies.

 

It is important to remember that EIS shares, SEIS shares and VCTs are high-risk investments and so may be difficult to sell.