The first quarter in any year has a strong tax planning focus. For individuals, we have the end of the tax year to consider, just five days into the beginning of the second quarter. For companies whose accounting periods mirror the corporate financial year, we also have year-end planning but of a different sort.
Isa and pension planning tend to take centre stage for many people and their advisers. This year sees the long-trailed reduction in the lifetime allowance to add to the pension input woe of those with enough to save and invest to be concerned about such things.
As I have said before, once the pension input route with tax relief and without tax penalty is closed off, the natural next place to look is for any other investments that offer a tax “turbo- charge” on investment.
In a world of uncertain and expected lower real returns, lower charges and lower taxes can make an even bigger impact on net returns.
No tax on capital growth at fund level can generally be secured through investment in authorised investment funds and offshore funds.
This fund-level capital tax-favoured treatment can be consolidated to the extent that the investor can realise gains within their annual capital gains tax exemption.
Leaving it until final encashment to do this can be extremely tax-wasteful but contriving realisations each year to use it can be difficult or unproductive. There are the anti-bed-and-breakfast rules to consider and the various bed-and-breakfast ways to circumvent them. Subject to these, the annual exemption can be used as a nice tax-effective side benefit through rebalancing exercises which are commercially justifiable and tax-effective.
The long-term tax beneficial effect of tax- effectively uplifting the acquisition price of an investment through the regular use of the annual exemption should not be underestimated.
The key to such planning being acceptable and justifiable is that it is led by an investment imperative in the shape of necessary rebalancing to stay within agreed asset allocation parameters – which themselves should be regularly reviewed so as to ensure they reflect the investor’s current attitude to risk and investment objectives. Capital gains arising within a life fund will be tax- free at fund level under an offshore bond and subject to UK corporation tax at 20 per cent under a UK bond but only after the application of the indexation allowance -linked to the RPI, not the CPI. Special rules apply in relation to deemed disposals in connection with collectives owned by the life fund.
Lower taxes on income (for higher and additional-rate taxpayers) can be secured through investment in investment bonds – UK and offshore.
In relation to dividend income, the UK bond is just as tax-effective a shelter/ deferment vehicle as an offshore bond, with no tax being levied at fund level. The investor in a UK bond, though, will qualify for a 20 per cent tax credit on chargeable-event gains arising on encashing the policy – a not inconsiderable benefit.
But however tax-effective a collective or bond may be, they do not deliver tax relief up front, so no turbo charge.
So what does? Well, the venture capital trust and enterprise investment scheme but they also carry an additional element of risk. The tax benefit comes at a potential commercial cost.
And we have had some news recently with the announcement of the launch of the seed enterprise investment scheme (Seis).
This investment will be available from April 6. The maximum total individual investment in a Seis will be £100,000 per tax year. The plain vanilla EIS has a limit of £1m from 2012/13 (£500,000 currently) although it offers 30 per cent income tax relief rather than the Seis’s 50 per cent relief.
An eligible Seis company must:
- Be no more than two years old;
- Have 25 or fewer full-time equivalent employees;
- Have gross assets of not more than £200,000; and
- May raise no more than £150,000 in total (not per tax year).
Exemption from capital gains tax will be available in 2012/13 for individuals who realise gains in 2012/13 that are reinvested, in whole or in part, in a Seis in 2012/13.
For an ordinary EIS, the CGT relief is a deferral of the gain reinvested, not an outright exemption. However, there is no limit on the amount of gain that can be deferred with an EIS. If income tax relief is not claimed, there is also no limit on the percentage of shareholding that may be acquired in an EIS company (it could be 100 per cent) whereas the Seis shareholding ceiling is 30 per cent.
More on this next week.
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