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Tax free and tax favoured savings

ISAs and PEPs
No changes have been proposed to ISAs or PEPs.


  • Growth Collective Investments
When considering investments for children it also worth remembering that there are no anti-avoidance provisions with regard to the annual CGT exemption and parents could therefore invest on behalf of their children (through, for example, designated unit trusts and OEICs) so as to ensure that the child&#39s CGT exemption is used. An easy way of ensuring that this opportunity is taken is for a parent to invest in, say, growth orientated collective investments, e.g. unit trusts or OEICs or investment trusts, so that the combination of taper relief and the annual exemption ensures that over the long term no capital gains tax is payable on the gain. This could be an attractive way of funding for the increasing costs of further education. Clearly, as for all savings, the most effective results will be secured if investment can be made over a relatively long period.

The designated account route is one that necessitates a willingness to give up beneficial access to the investment used in the strategy from outset. The gift would normally be exempt for inheritance tax purposes or, to the extent it is not exempt, constitute a potentially exempt transfer.

Where the donor does not wish to make an immediate gift of the assets in question, perhaps because he or she wishes to maintain access to the funds, then a “deferred” gift of a collective investment will trigger a potential CGT liability on the donor when the gift is actually made, e.g. when the child enters into further education at age 18 or over. The assignment of the collective investment, at that point, will be a disposal for CGT purposes with the “market value” rule imposed to determine the amount of the gain. All gains and income on the “non-designated” collective would be assessed on the investor (parent) during the period of his or her ownership, ie. up to the point of assignment.

  • Capital Investment Bonds
For parents wishing to provide for further education, serious thought should be given to, say, a non-UK capital investment bond with an assignment of sufficient segments (whole policies) to the child when he/she is 18, when the costs of further education are to be incurred. The assignment would be for no consideration and so would not give rise to a chargeable event and any gains arising on subsequent encashment by the student would be assessed on the student. Any available personal allowance, 10% tax band and basic rate tax band would, in most cases, help to keep tax to a minimum.

People have a wide range of savings needs for the short and longer term. ISAs and stakeholder pensions provide simple, flexible products that meet those needs. The Government is also making the savings system more integrated by improving transferability between investment vehicles. The tax rules for pensions allow someone to contribute at least £3,600 a year, regardless of earnings. They can also start saving in an ISA and transfer the money into a pension when they are ready to save for the longer term and are happy to accept the product constraints of the pension. Also, anyone who builds up shareholdings in the new all-employee share ownership plan will be able to transfer shares directly into an ISA or stakeholder pension.

In summary it must be remembered that:

  • the ISA is now the only tax favoured vehicle for new subscriptions where an individual wishes to invest in equities (outside of a pension plan)
  • all PEPs held at 5 April 1999 can continue to be held as PEPs outside the ISA but with the same tax advantages as the ISA. This means that the 10% tax credit on UK dividends can be paid to PEPs until 5 April 2004
  • there is no maximum lifetime subscription limit to an ISA. The Government have given a commitment for the scheme to run for 10 years with a review of its operation after seven years
  • a person is not prevented from investing the maximum to an ISA because of a holding in a PEP or TESSA
  • savers with existing TESSAs opened before 6 April 1999 may continue to pay into them under existing rules for their full 5 year life

  • One measure has been proposed in connection with the Venture Capital Trust (VCT) under which provisions are to be introduced that will enable VCTs to retain approval when they merge with each other, so safeguarding their investor&#39s tax reliefs. The provisions will also introduce a grace period during which a VCT is treated as approved while it is being wound up.


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