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Individual savings accounts (ISAs) provide an income tax and capital gains tax free form of investment. The maximum investment limits are set for tax years. Therefore to take advantage of the limits available for 2004/05 the investment(s) must be made by 5 April 2005. Stocks and shares, cash and life insurance can be held in an ISA (see table for maximum annual investment limits).
Annual ISA investment limits
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£
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| Total investment |
7,000
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| Which can include: |
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| Cash investment (up to) |
3,000
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| Life insurance (up to) |
1,000
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In practice most ISA providers are selling ISAs solely investing in stocks and shares. However, banks and building societies are providing mini cash ISAs. Note that if, say, a cash mini-account is opened, no maxi-account can be opened in the same tax year so that only a mini stocks and shares ISA can be opened (which is limited to a £3,000 investment).
Since 6 April 2001 it has been possible for 16 and 17 year olds to open a cash ISA. The contribution limit is £3,000 a year. Care must be taken to ensure the funds to open such an ISA did not come from the child’s parents. In that case the income would be taxable on the parents if, with any similar income, it exceeded £100 a year.
It has not been possible to open a new TESSA since April 1999. On maturity, the capital (but not interest) could be transferred into the cash component of an existing maxi ISA, or into an existing mini cash ISA or into a TESSA-only ISA within six months of maturity without affecting the annual ISA investment limits.
Although new PEPs have not been available since April 1999, it is possible to consolidate single company PEPs with a general PEP or create a general company PEP out of single company PEPs. This has the advantage of allowing more flexibility for sales and purchases of investments.
There is a wide range of National Savings products, eg NSB savings accounts, savings certificates and bonds. These are taxed in a variety of ways. Some, such as National Savings Certificates, are tax-free.
For those whose income may fall in the future, for example due to retirement, investments deferring income to a subsequent period may be attractive. For example single premium life assurance bonds and ‘roll-up’ funds can achieve this effect.
The Enterprise Investment Scheme (EIS) allows new equity investment of up to £200,000 in any tax year in qualifying unquoted trading companies (including AIM). Income tax relief at 20% is available on the investment and capital gains tax exemption is given for shares held for at least three years.
Furthermore unlimited capital gains may be deferred by reinvestment in EIS shares. An added benefit is that after two years of ownership EIS shares will qualify for business property relief for inheritance tax purposes.
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 the shares. Income tax relief, currently at 40%, is available on subscriptions for VCT shares, up to £200,000 per tax year, if the shares are held for at least three years. The ability to defer capital gains by investing in VCT shares has been abolished.
Film partnerships have become popular due to the government giving enhanced tax reliefs for investment in qualifying films. The scheme involves becoming a partner in a business that purchases a qualifying film. The up-front loss created may give tax relief against income and/or capital gains. If the investment cannot be funded wholly in cash, packaged loans are usually available. Borrowings are financed by a rental stream from the film producers, guaranteed for a fixed period of time. Of course, the rent is taxable, so the loss relief is effectively clawed back over a period of time. The government is concerned that the scheme has been abused and is planning to replace the scheme with a new one from July 2005.
A similar scheme involves Enterprise Zone Trusts (EZTs). Investing in commercial buildings via an EZT will give tax relief on the investment. Again, packaged loans, which work in a similar way to film partnerships, are often available.
There are no monetary limits to either of these schemes.