For tax-reducing investments, either taxable income is reduced, and thereby the tax payable is less, or the actual tax is reduced through making the investment.
With most of these investments, they must be seen as higher risk and you could lose your capital. The tax-efficient investments outlined below are complicated, and the following is only a brief summary of the potential benefits. Professional advice is strongly recommended.
Enterprise Zone Syndicates (EZS)
The investment amount is unlimited. Investments are made into commercial buildings and are 100% deductible – the land is not deductible, so usually around 90% of the investment made (‘qualifying expenditure’) reduces taxable income, for both individuals and companies. Syndicates can offer gearing where a bank can fund some of the investment. Duration is 6-7 years at least and the investment is illiquid.
Tip: This tax shelter ends in this tax year. The self employed can offset against their January 31st Payment on Account, employed persons can reclaim their tax after 5th April. You can only offset current year’s income and not a capital gain.
Enterprise Investment Scheme (EIS)
Individuals can invest up to £500,000 each per tax year. 20% of the investment made reduces your income tax bill. EIS investments can also defer a capital gain (and can be made to get back CGT already paid); and if held for 2 years, the value of shares purchased is out of your estate for inheritance tax purposes.
Losses on the investment are deductible from income or capital gains. Duration must be at least 3 years for income tax relief. If set up privately, individuals can invest and receive remuneration for services to the company without losing tax reliefs.
Tip: Tax relief can be backdated to the previous tax year in full.
Venture Capital Trusts (VCT)
Individuals can invest up to £200,000 each per tax year. 30% of the investment reduces your income tax bill. Income from a VCT is tax free, and there is no CGT liability when the investment is realised. Duration is at least 5 years to retain the tax reliefs.
Tip: Tax free status like an ISA, but tax deductible, and has higher investment limits.
Personal Allowances are gradually reduced to zero from 6 April 2010 for earnings of £100,000 or more. The marginal rate of tax where the personal allowance is lost will be 60%. Making pension contributions can reduce taxable income to enable more of your personal allowance to be effective. The rules are complicated and tax relief depends on earnings and current contributions.
This is possibly the last tax year where the annual allowance for pension contributions is available - currently £255,000 – this will probably reduce to £30,000 - £40,000 next tax year. Companies can also make tax-reducing investments through investing into qualifying companies under the Corporate Venturing Scheme (CVS), and the EZS mentioned above.
By Tony Granger