Investments - are yours tax efficient?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.
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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 2005/06 the investment(s) must be made by 5 April 2006. You can invest either in a maxi ISA or mini ISAs. The maxi ISA route gives you the option to invest up to £7,000 (per tax year) either fully in stocks and shares or up to £3,000 in cash with the balance in stocks and shares. Under the mini ISA route, up to £4,000 can be invested in stocks and shares and up to £3,000 in cash. 16 and 17 year olds are able to open (mini) cash ISAs.
Tip
The government is committed to retaining the annual limit of £7,000 until 2010 so a couple starting to invest in ISAs now could save a total of £70,000 by 2010.
National Savings 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 £200,000 per tax year. CGT exemption is given on 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 40% is available on subscriptions for VCT shares up to £200,000 per tax year so long as the shares are held for at least three years.
Enterprise Zone Trusts allow investors to invest in qualifying property and obtain immediate tax relief of up to 40% on their investment. There is no upper limit on the investment.
Film partnerships - investors become partners in a business that purchases a qualifying film. The loss created can, in certain circumstances, be set against income and/or capital gains, to give higher rate tax relief. The current scheme comes to an end on 31 March 2006 subject to certain transitional provisions. The government has announced proposals for enhanced tax relief which will apply to British film companies from 1 April 2006.
Second hand endowment policies (SHEPs) can be very 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. Your mortgage does not qualify for any tax relief.
