Tax efficient investments
The information in this fact sheet is necessarily of a general nature, and we strongly recommend that you consult with us before taking any action.
Individual Savings Accounts (ISAs)
ISAs are available from banks, building societies and a variety of other providers. The maximum annual deposit for 2010/11 is £10,200.
The maximum cash ISA is £5,100.
16-17 year olds can invest up to £5,100 in a cash ISA.
All income earned on investments within an ISA is exempt from income tax. However, tax credits on dividends arising within an ISA are no longer repayable. Gains made on ISA investments are exempt from capital gains tax.
Child Trust Funds (CTFs)
CTFs are long term savings and investment accounts which are not subject to tax on income or gains and do not affect benefits or tax credits. The funds may be invested in and can only be withdrawn when the child, who must have been born on or after 1 September 2002, reaches 18.
A Government voucher for £250 (£500 for low income families) is used to open the account and there will be a further £250 or £500 when the child is 7. Up to £1,200 pa may be paid into the account.
Income tax relief is obtainable at 20% in respect of amounts of up to £500,000 a year subscribed for ordinary shares in certain unquoted companies. In addition, capital gains tax deferral relief is available on such investments at up to 40%. There is no limit on the amount of gain which may be deferred.
Gains on the disposal of shares are exempt from capital gains tax after three years although the original deferred gain will then be chargeable; losses are relievable against either income or capital gains if the shares are disposed of at a loss.
It is essential to obtain further information and detailed advice before making an investment of this type because there is an element of risk in investing in shares.
Individuals investing up to £200,000 a year in VCTs will be exempt from tax on resulting dividends and on capital gains when they dispose of shares.
Individuals who subscribe for new ordinary shares in VCTs will, in addition, be entitled to income tax relief at 30% on up to £200,000 in any tax year, provided the shares are held for at least three years.
Friendly society savings policies
Although the extent to which investments may be channelled into these funds is fairly limited, they nevertheless provide a modest level of tax-efficient investment.
The maximum holding of these certificates should be considered by all higher rate taxpayers as the tax free yield often compounds to a very competitive level.
Income and capital bonds.
Interest is liable to income tax, but paid gross. Income bonds pay interest (variable) monthly. On capital bonds, the interest (guaranteed for five years) is added to the capital annually. Income bonds are repayable on three months notice; capital bonds may be repaid without notice.
Children's bonus bond.
These may be bought by anyone over sixteen for individuals under 16. Interest is guaranteed for five years at a time until the holder is twenty-one. The bonds are totally tax free, which is an important feature for parents (normally parents are liable to tax on interest over £100 on gifts to their children).
Please contact us if you would like more help or advice in this area.