Tax efficient investments offer you relief from one or more taxes - Income Tax, Capital Gains Tax and Inheritance Tax. Each type of investment has its own set of qualifying conditions which must be satisfied by you. Some of these investments require that the company seeking investment also meets qualifying conditions.
The ISA wrapper is a useful tool for a higher rate taxpayer, since any growth will be free of Income Tax and Capital Gains Tax.
The ISA limit for the 2023/24 tax year is £20,000. This limit cannot be carried forward therefore, if you fail to utilise the full allowance, it will be lost.There are various types of ISAs (such as Junior ISA, Lifetime ISA).Junior ISAs are available for all UK resident children under 18 years of age. Up to £9,000 can be invested in 2023/24 on behalf of a child (by parents, grandparents, relatives or friends). No withdrawals are permitted until the child reaches 18.Generally, if you give money to your own children, the interest earned must not exceed £100 per tax year, otherwise you will be subject to tax on the income at your marginal tax rate. However, Junior ISAs are excluded from this rule.
Tax Tip I Pension Annual Allowance already maxed out?Where you have already utilised your pension Annual Allowance, ISA investments may offer an appropriate alternative.
Consider making full use of your ISA allowances before the end of the tax year.
The SEIS is designed to encourage individuals to invest in shares issued by qualifying, unquoted companies established in the United Kingdom.
The scheme is specifically designed for small, start-up trading companies.
There are various conditions that a company and you must satisfy for a certain period of time.
A company can raise a maximum of £250,000 through SEIS investment, but there are no tax reliefs available to a qualifying company that is seeking investment.
The tax reliefs are given to you. You can invest up to £200,000 per tax year. You receive Income Tax relief of up to 50% of the amount invested. The relief can be claimed against the current year and/or previous year’s Income Tax liability.
Where SEIS shares are sold after three years any gains should be exempt from Capital Gains Tax but only if you made an Income Tax relief claim.
The SEIS also offers another form of Capital Gains Tax relief. If you dispose of any asset which results in a chargeable gain and then re-invest all or part of the amount of the gain in shares which qualify for SEIS relief, 50% of the amount invested, up to £100,000 of the original capital gain, may be exempt from CGT.
The value of SEIS shares would be exempt from Inheritance Tax after being owned for two years.
The EIS is similar to SEIS and, again, there are various conditions of the scheme that a company and you must satisfy for a certain period of time.
A company can raise up to £12m, and a Knowledge Intensive Company can raise up to £20m, under the EIS scheme.You can invest up to £1m in a tax year or £2m if the company is a ‘Knowledge Intensive Company’. Your tax liability will be reduced by 30% of the sum invested. Relief can be claimed against the current year and/or previous year’s Income Tax liability.
For EIS shares sold after three years, any gains should be exempt from Capital Gains Tax but only if you made an Income Tax relief claim. The value of EIS shares would be exempt from Inheritance Tax after being owned for two years as they qualify for Business Relief.
EIS also offers another form of Capital Gains Tax relief whereby a Capital Gains Tax liability can be deferred on any asset where the gain is invested in the shares of an EIS qualifying company in the twelve months before or three years after the disposal.
If you subscribe for equity or for a debt instrument issued by a ‘Social Enterprise’, you are entitled to Income Tax relief of 30% of the amount subscribed. A Social Enterprise means a ‘Community Interest Company’, ‘Community Benefit Society that is not a charity’, or ‘a charity’.
The maximum subscription by you is £1m in a tax year.
You can make a claim to carry back relief to the tax year preceding the year of investment. If the investment is a subscription for shares then any gain realised on the disposal will not be subject to tax provided certain conditions are met.
As with EIS, SITR offers another form of Capital Gains Tax relief whereby a Capital Gains Tax liability can be deferred on any asset where the gain is invested in the shares of a SITR qualifying company in the twelve months before or three years after the disposal.
