View more on these topics

Gimme shelter

Can you explain to me the recent rule changes surrounding tax-efficient investments as I am interested in maximising the options for myself and my children?

There are a reducing number of tax-sheltered investments available for UK taxpayers, so investors should make full use of the choices which remain.

Apart from pension tax relief, the Isa has been the first point of call for many investors to benefit from capital gains tax and income tax benefits. According to the Halifax, over 16 million Isas exist.

The recent Budget made changes to the operation of Isas. Until now, there have been three components available within Isas – stocks and shares, insurance and cash. However, from this tax year, insurance will fall under the stocks and shares component.

The maximum Isa investment limit will remain at 7,000 until 2010, which brings the cumulative total which could be saved tax-efficiently since 1997 to over 100,000.

The Chancellor has extended the qualifying investments allowable in Isas to include all retail collective investment schemes which do not have restrictive encashment terms and are authorised by the FSA. It is expected later this year that all Ucits and non-Ucits funds, including property and gold, will be made available within Isas.

The child trust fund is a tax-efficient savings account for children born on or after September 1, 2002. It matures on their 18th birthday. Qualifying children will receive a voucher from the Government worth at least 250 to invest into a child trust fund. The voucher must be used to open an account within 12 months of the issue date.

A total of 1,200 on top of the value of the voucher can be invested into the child trust fund each year. At the child’s 18th birthday, the fund will be available tax-free.

Tax-free income can be generated through certain National Savings products such as its fixed-interest savings certificates and index-linked savings certificates. A maximum of 15,000 can be invested in each issue.

Children’s bonus bonds also offer tax-free income with a limit of 3,000 per child in each issue.

Investment in friendly society policies is limited to 270 a year or 25 a month. Although friendly society life funds are free of tax, the qualifying rules on life insurance policies apply. This means that profits on a policy surrendered before maturity could be chargeable to personal income tax at the individual’s full rate.

Friendly society bonds are a popular solution for children’s investments because the returns are tax-free at maturity and the bonds are not income-producing assets. This avoids annual interest above 100 paid on a child’s investments set up in the name of a parent being treated as the income of the parent. The whole sum is taxable, not just the excess over 100 a year.

If your attitude to risk is adventurous, you might wish to consider venture capital trusts or enterprise investment schemes. Essentially, VCTs are investments in small, unlisted trading companies. At least 70 per cent of the portfolio of a VCT must invest in the shares of unquoted trading companies or fledgling companies. The range of companies’ activities can be as far-reaching as technology to homebuilding. Certain investment companies specialise in offering packaged VCTs which can match your investment requirements.

Investors receive 40 per cent of their investment as a deduction from their income tax bill up to a maximum 200,000 investment each tax year. Dividends are not subject to further tax in the hands of the investor and capital gains made on the VCT investment are tax-free.

EISs offer 20 per cent income tax relief on new ordinary shares up to 200,000 each tax year. For most investors, an EIS is the only means of deferring capital gains tax liabilities. EISs tend to invest in individual companies while VCTs spread your investment between a number of companies, thereby diversifying the risk.

The 100 per cent tax relief available to individuals who invest in British films via film partnerships has been extended to March 31, 2006. Be aware that there is a raft of anti-avoidance measures being introduced by the Finance Bill 2005 to counter some of the tax shelters available for film production expenditure.

There are many ways to gain access to the main asset classes. Whether using tax-efficient products such as Isas, VCTs, EISs, film partnerships or a pension fund, you should not forget the fact that your overall holdings should match your risk profile and investment outlook. With all products, it is important to examine the returns provided and ensure that, if the product is tax-efficient and offers little risk, this is equitable compensation for lower interest rates or returns.


Skandia’s secret is in the blend

Skandia Investment Managements asset allocator fund range comprises seven multi-manager Oeics which enable IFAs to build a bespoke mix of asset classes across different geographical sectors.

Green takes over PMI chair

Penny Green takes over as president of the Pensions Management Institute from July, replacing outgoing chief Roger Cobley.

Closing in on nirvana

In the past few weeks, the FSA has published its intentions surrounding regulation of the promotion of financial services.


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