View more on these topics

A capital idea

I am a higher-rate taxpayer with a capital gains tax liability arising this year. I have heard people talk about various tax-saving schemes and wondered if you could briefly outline the main schemes

and explain how the

tax reliefs work.

During the 1990s, a number of initiatives were enacted to encourage investment into qualifying unquoted companies. These are basically companies that carry out a qualifying trade and that are not listed on the main stockmarket. Companies that have their shares quoted on Ofex and Aim are considered to be “unquoted” so these still qualify.

One of the difficulties in picking tax relief is that the legislation has often augmented the rules in each area in subsequent finance bills so there is no easy way to check the facts. This summary is designed to give an overview of the tax relief available and to provide guidelines.

It is not comprehensive, mainly because tax relief apply to individual circumstances. It is important to check with your own tax adviser or get professional advice.

Remember that qualifying unquoted companies are inherently riskier than other types of investment and you should never invest on the basis of tax relief alone. There are a number of different schemes available, but I will focus on three for the sake of simplicity.

Enterprise investment schemes

This started in 1994 as a Government initiative to encourage private investors to put money into the British companies that are the key drivers of our economy – entrepreneurial small to medium-sized enterprises. The EIS itself is potentially very attractive to the investor seeking opportunities at this high risk/high reward end of the market.

Investors receive a 20 per cent tax rebate to start, with freedom from CGT on disposal and loss relief which mitigates investment exposure to 48 per cent of the original outlay, if the investment is a complete failure (for higher-rate taxpayers).

Venture capital trusts

VCTs are investment companies listed on the Stock Exchange and strictly regulated as to what they may do. VCTs invest in unquoted companies which meet the EIS rules.

VCTs are not taxed on the capital profits they make on their investments and they can also pay their shareholders the realised capital profits as a tax-free dividend. The biggest difference between making an EIS and VCT investment is that your VCT share represents a

basket of shares as opposed to the EIS investment being in just one company.

You benefit from spreading the risk across a portfolio but there is a cost for the administration of the VCT and for its manager&#39s expertise, which can make quite a difference to the net return.

Not all VCTs are equal. Do check out the key areas of performance and cost – these can have a seriously beneficial or damaging impact on your investments. In theory, VCTs should be more liquid than EIS investments when you come to exit. Since the early VCTs of the mid-1990s had a minimum holding period of five years,

in order to maintain tax relief, there has not been much opportunity to check this out yet.

To qualify for VCT tax relief you must be an individual who is at least 18 and your investment limit is £100,000 for each tax year. If you want to defer gains you must be a UK resident for three years.

Film partnerships

Investors purchase interests in a partnership set up to acquire and exploit film rights in British films. Investors put up 15 to 22 per cent of the cost with the balance being a loan from a financial institution.

Because the acquisition cost can be written-off in the first accounting period, it creates a tax loss which investors can set off against the current year&#39s or previous year&#39s income tax or capital gains tax, or carry back for up to three years against income tax only.

The effect of the write-off is to generate an immediate positive cash flow equal to the difference between the cash put up by the investor and 40 per cent of the gross investment.

Cash flow in the following periods differs between the types of film partnership on offer and you will need to consider the individual offerings. “Sale and leaseback” deals are the most common.

A “sale and leaseback” deal is where the partnership purchases a film and leases it to a distributor in return for a yearly revenue stream increasing at about 5 per cent a year. This is in line with the Inland Revenue Statement of Practice on the tax treatment of expenditure on films issued in March 1998.

“Sale and leaseback” deals effectively offer a low-interest loan of 4 to 4.5 per cent) from the taxman. They are simply deferral vehicles and the tax catches up in later years.

Recommended

&#39Fee increase may see 10% leave DBS&#39

DBS could lose up to 10 per cent of its members in the wake of last month&#39s 30 per cent fee hike, says a City analyst.It claims Misys&#39 IFA operations will be hit by increased competition from IFA service providers such as Bankhall getting significant backing from major product providers.The Commerzbank analyst&#39s report, seen by […]

First State fund buys British

First State Investments has established the British mid-cap fund, an Oeic that aims for capital growth by investing in medium-sized companies within the UK.The fund is part of First State&#39s British range, which consists of three other funds, British smaller companies, British all companies and British opportunities.The British mid-cap fund will consist of between 60 […]

Franklin Templeton Investments – Franklin Sterling Corporate Bond Fund

Wednesday, January 23, 2002.Type: Ucits.Aim: Income and growth by investing in sterling corporate bonds.Minimum investment: $5,000 or currency equivalent.Place of registration: Dublin.Investment split: 100 per cent in sterling corporate bonds.Isa link: Yes.Charges: Initial up to 5 per cent, annual 1.5 per cent.Commission: Initial 3.5 per cent, renewal 0.5 per cent.Tel: 020 7925 7171.

Editorial: FSA&#39s blow for class system

Congratulations to the FSA and the Labour Government for striking a blow for the beleaguered British class system with a neo-feudal system of financial advice.The barons get fee-charging independent financial consultants, the squires and knights, that&#39s you, Sir Howard, see fee-rebating IFAs. Middle England&#39s freeholding farmers get commission-charging distributors and freedmen have gap-filled banks.The serfs […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment