View more on these topics

Alternative to an Isa

I am a 35-year-old bach-elor who has recently inherited just under

£150,000. I am in a professional occupation and have recently

started to achieve my full earnings potential, which means that I now

have surplus monthly income. I have used the inheritance to repay my

mortgage and upgrade my car. This has left me with just under

£20,000 in a high-interest instant-access building society

account. I have no other savings, investments or debts. I want to

invest the £20,000 in a more appropriate investment environment

utilising my Isa allowances where appropriate. I am interested in

very speculative investment opportunities such as smaller com-panies

funds, where I appreciate that the potential for gains is good but

that the potential for losses is high. How would you advise me to


The investment areas you are considering can be very volatile and

should be considered long term. If the need arises to access your

investment in the early years, it could prove very detrimental and,

therefore, any investment in this environment should be capital that

you can afford to leave well alone and, more important, that you can

afford to lose.

The first thing I would advise is not to invest all your capital.

Everyone should retain a portion of their funds in an easy access

deposit account to cover unforeseen eventualities and short-term

spending requirements. The amount that should be retained on deposit

varies from person to person but I would suggest that £5,000 to

£10,000 be considered.

There are a number of smaller companies funds which could be suitable

for the balance of your capital. Like many investors, you may believe

that utilising the full £7,000 Isa allowance in the current tax

year is the most appropriate step. It goes without saying that the

less tax you have to pay on your investments, the faster they will

accumulate. Tax avoidance measures are important, especially for

higher-rate taxpayers.

Gains will be tax-free without utilising your annual capital gains

tax exemption, dividend income will be free of income tax and the tax

credit on any dividends received before April 2004 can be reclaimed.

However, given your investment objectives and risk profile, I feel

that there is an even better alternative.

Venture capital trusts seem to be a very well kept secret but would

meet your objectives and be more tax-efficient than an investment

utilising your stocks and shares Isa allowance. VCTs offer

individuals almost identical tax advantages as an Isa (no capital

gains tax on eventual sale and no income tax on dividends) but have

significant additional advantages. The most important from your

perspective is the income tax relief on initial investment. For every

£1,000 you invest in a VCT, the Inland Revenue will reduce your

income tax liability by £200. This is only repayable if you

encash the investment in the first three years.

A VCT can retain a portion of its funds in low-risk investments but

ultimately the majority of it will be invested in unquoted or

Aim-quoted companies that have prospects for significant growth. In

theory, the degree of risk within a VCT which only invests in

Aim-listed securities is lower as there is a formalised market for

the underlying company shares. An Aim-based VCT managed by a

reputable manager seems to offer an extremely tax-efficient way for

you to expose the desired portion of your capital to a portfolio of

investments in smaller companies.

My preferred Aim-based VCT offering at present is Phoenix VCT from

Octopus Asset Management. It will invest in a diversified portfolio

of established Aim-listed UK smaller companies and will be managed by

some of the most successful smaller company fund managers in the UK.

Your investment will leave your Isa allowance intact and it would be

prudent to transfer £3,000 of your retained deposit capital into

a mini cash Isa for the current and possibly the next tax year.

Competitive interest rates are available, access need not be lost but

no tax will be payable on the income.

Assuming the interest rate achieved is the same as the non-Isa

deposit account, the effect of the tax relief to a higher-rate

taxpayer is an increase of 66.66 per cent on the after-tax income

received on this portion of deposit capital.


£750k fine for BoS fund admin failure

Bank of Scotland has been hit with a fine of £750,000 by the FSAfor failures in administering its Pep and Isa funds between November1999 and August 2001.According to the FSA, BoS put 30,000 Pep and Isa fund customers atrisk of losing money and increased its own exposure to potentialfraud.The regulator says the bank&#39s systems used […]

Life offices don&#39t want Revenue&#39s drawdown cash

Income-drawdown providers are objecting to Inland Revenue proposalsthat will give them cash windfalls if clients die before 75.The Revenue&#39s pension simplification proposals, published inDecember, limit death benefits on drawdown to the value of theretirement savings paid in, less income taken out. Funds over thisthrough investment growth, would be paid to the drawdown provider.Providers and advisers […]

L&G offering fixed rates and discounts on new BTL range

Legal & General Mortgages is launching four buy-to-let flexiblemortgages offering borrowers discount and fixed-rate options.There are three fixedrate loans. The first is fixed for two years at5.35 per cent, the second is a fiveyear fix at 5.59 per cent and thethird is fixed at 5.74 per cent for 10 years.Early repayment char-ges are 2 per […]

Well done Axa Equity & Law

Unfortunately, we are an industry in turmoil and we seem to lurchfrom one disaster to another.One of the most annoying things, among many, is the decline instandards of administration by the various life offices, some, ofcourse, being far worse than others.Most of us are quick to complain but usually slow to praise. I wouldjust like […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm