Investment solutions

by admin on January 11th, 2010

Achieving the most efficient mix of risk and return

Do you currently have the most suitable method of holding and structuring your investments to achieve an efficient mix of risk and return that is specific to your particular objectives? And are you fully utilising the income, capital gains and inheritance tax advantages of these investments, particularly as the taxation regime governing them may be subject to change in the future? We have provided a selection of tax-efficient solutions you may wish to discuss with us.

The over-50s were able to shelter more of their money from the taxman on 6 October last year when Individual Savings Account (ISA) limits rose by £3,000 to £10,200, or £20,400 for a couple. Everyone aged 18 and over will be given the new limit from 6 April 2010.

Venture Capital Trusts (VCTs) enable individuals to invest in unquoted and AIM-listed firms, and give tax-free capital gains as well as income (usually taxed at 32.5 per cent for 40 per cent taxpayers). They also attract initial tax relief at 30 per cent, which is an income tax relief that is given as a tax reducer, as long as they are held for five years. The maximum investment is £200,000 a year. This type of investment does come with a high degree of risk.

Enterprise Investment Schemes (EISs) invest in firms typically involved in a particular sector or project, and give income tax relief of 20 per cent on up to £500,000 a year, if held for three years. Gains are tax-free, but not income, and investments fall outside your estate for inheritance tax purposes after two years. This type of investment does come with a high degree of risk.

EISs also allow you to defer Capital Gains Tax (CGT) incurred in the previous three years or the subsequent 12 months, which is attractive if you paid at the old rate of 40 per cent (in force until 6 April 2008). While you still have to pay CGT on EIS shares bought with tax-deferred funds, you could save 22 per cent on past gains.

Onshore investment bonds are taxed internally at the 20 per cent basic rate. However, up to 5 per cent a year of the original investment (a minimum of £5,000, but no maximum) can be withdrawn for 20 years without any immediate tax liability. And you can ‘roll up’, taking 3 per cent income in one year and 7 per cent the next. If you become a basic rate or non-taxpayer when the bond matures, there is no further tax to pay.

Gifting income-producing assets to your spouse, where he or she is a lower rate or non-taxpayer, could save high earners a considerable sum. Say you had a portfolio of investment properties worth £500,000, which produced an income of 5 per cent or £25,000 a year. If you were a high earner and held the investments in your own name, you would be liable for tax on the income of £12,500 from the 2010/11 tax year. However, if you gifted the assets to a spouse who had no other income, the first £6,475 would be tax-free and the remainder taxed at 20 per cent, so just £3,705, which equates to a £8,795 tax saving. This example is based on the original owner having total taxable income above £150,000 (hence the liability on the £25,000 rental income would be 50 per cent rather than 40 per cent).

Venture Capital Trusts and Enterprise Investment Schemes are specialised, complex investments and are not suitable for everyone. They should only be considered as part of a balanced portfolio and advice should be sought prior to investing. These could be high risk investments. The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.

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