Individual Savings Accounts (ISAs)
The standard ISA contribution limit for 2011/12 is£ 10,680, of which up to £ 5,340 may be placed in a cash ISA. For the recently launched Junior ISA, the limit is £ 3,600. The main ISA limit will rise by £ 600 for 2012/13 (£ 300 for the cash component), but the Junior ISA ceiling will be unchanged. Unlike pension contributions, there are no carry forward provisions for ISAs so maximising your contributions whenever possible is normally a wise move. With the higher rate tax threshold and CGT annual exemption both frozen in the coming tax year, the tax shelter offered by ISAs is become increasingly relevant:
- There is no UK tax on dividends in a stocks and shares ISA, although tax credits cannot be reclaimed
- Interest is received UK tax-free in an ISA, other than from cash held in a stocks and shares ISA (for which a flat 20% rate applies)
- There is no capital gains tax on profits
- ISA income and gains do not have to be reported on your tax return
With short-term interest rates seemingly set to remain at historically low levels for some time, the tax benefits of a cash ISA are small, even for 50% taxpayers. Variable rates of around 3% are on offer for new savings, but these rates normally contain a large bonus element which falls away after a fixed period, typically 12 months. If you arranged a cash ISA around this time last year, it is worth checking what interest rate your cash will earn after the ISA’s first anniversary. If income from your ISA is important to you, a transfer of existing cash ISAs to a stocks and shares ISAs is an option worth reviewing. A transfer would mean an end to the security of a capital deposit,but your income could rise significantly.
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
VCTs and EISs are to undergo a range of changes from next tax year. While most of these will be beneficial, there is one which may mean ‘limited life’ variants are much less common from 2012/13 onwards. The new Seed Enterprise Investment Scheme (SEIS)offering 50% income tax relief (see below), which the Chancellor revealed in November, will not become available until next tax year. The current tax benefits of VCTs and EIS are:
|
Feature
|
VCT
|
EIS
|
| Income tax relief on initial investment |
30% on investments up to £200,000 per tax year
|
20% on investments up to £500,000 per tax year
|
| Minimum holding period to avoid tax relief clawback |
5 years
|
3 years
|
| Dividends |
Tax-free (but no reclaim for tax credits) and often paid from capital
|
Taxable (but profits usually retained, not distributed)
|
| CGT reinvestment relief |
None
|
Gains may be reinvested in an EIS up to three years after realisation or one year before. No limit.
|
| Capital gains on proceeds |
Nil
|
Nil (except for reinvested gain)
|
| IHT business assets relief |
None
|
Usually available after two years’ ownership
|
VCTs and EIS are both high risk investments in very small companies and should only form a small part of a well diversified investment portfolio. The investment risks involved are the main reason why the government is prepared to offer generous tax advantages.
The Seed Enterprise Investment Scheme
About the most interesting part of last November’s Autumn Statement was the Chancellor’s announcement of the Seed Enterprise Investment Scheme (SEIS). The weekend press subsequently made much of it because of the tax relief on offer; 50% income tax plus up to 28% capital gains tax. However, the ‘better-than-a-pension’ stories proved to be rather over-egging the new scheme, as subsequent information from the Treasury revealed:
- The maximum total investment you can make in SEIS will be £ 100,000 per tax year, starting in 2012/13
- The capital gains tax relief will only be available for the first year of the scheme
- An eligible SEIS company must:
- be no more than two years old;
- have 25 or fewer full-time equivalent employees;
- have gross assets of no more than £ 200,000; and
- may raise no more than £ 150,000 under the SEIS in total (not per tax year)
These limits suggest that the SEIS will be a highly specialised investment, separate from the well-established markets for Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs). The government estimates that the SEIS will benefit ‘300 or more’ companies in its first year. Some commentators believe the take up will be even less because the costs of carrying out ‘due diligence’ on such juvenile enterprise will weigh heavily on the tax relief available. Similarly, such small, new companies may be reluctant to grapple with the all the anti-avoidance legislation surrounding SEIS for the sake of no more than £ 150,000 of fresh share capital. If you are tempted by SEIS, make sure that you have considered other investment options, including pensions, first. The very high tax relief is a reflection of very high risk. If you would like to know more about Fiducia’s Investment Management process or to speak with one of our Financial Advisers please visit our website: www.fiduciawealth.co.uk or call 01206 321045.
Past performance is not a reliable guide to the future. The value of investments and the income from them can godown as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FSA does not regulate tax advice.This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at January 2012 and the contents of the 2011 Autumn Statement and draft Finance Bill 2012 clauses. No action must betaken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.