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Ready for the year end?

Posted on January 18 2012 at 2:20:22 0 comments

Make the most of the tax benefits on offer, writes Austin Broad.

With global austerity measures forming the watchword for many developed economies and interest rates looking mired at ultra low levels, it is more important than ever to ensure that we review our finances to make the most of any opportunities.

Income Tax
Individual Savings Accounts (ISAs) allow UK residents to invest up to £10,680 per annum (2011/12) in a combination of cash and stocks and shares. Up to a maximum of £5,340 can be invested in the cash element, or up to the full £10,680 can be directed to the stocks and shares element.

The limit will be increasing in the tax year 2012/2013 with the limits above increasing to £5,640 and £11,280 respectively. This means that a couple can invest up to £21,360 in this year and £22,560 from 6th April 2012 into an investment that will allow all future interest and capital gains to be highly tax efficient both in the current tax year and all future years.

The new Junior ISA also adds an option for parents and grand-parents to consider ways of investing for the benefit of their children in a tax efficient way.

For those with a more adventurous spirit, the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) provide not only tax-efficient future growth and income, but also tax relief for investors.

EIS offer up to 30% tax relief on investments up to £500,000 in 2011/12. While future income on the investment would be taxable, there is no capital gains tax liability and for those with capital gains that have been realised in the last three years, it is possible to defer these gains into the future.

These schemes should also qualify for business property relief after two years. This valuable benefit means that upon death after this two year qualifying period, the value of the investment would not be counted in the deceased estate for Inheritance Tax calculation purposes, a further potential tax saving of 40%. This investment must be held for a period of three years to retain the tax benefits.

VCTs in the 2011/2012 tax year also offer up to 30% Income Tax relief on investment into new shares. Income from the investment is free of Income Tax (although 10% tax credit cannot be reclaimed and future gains on the investment shares are tax exempt, although the investment has to be held for a minimum of 5 years.

There are a wide range of schemes available in some very interesting growth areas, although it should be stressed that investments into Venture Capital Trusts and Enterprise Investment Schemes are complex and carry a significant risk to capital. Advice should be sought if considering investing into this area.

Pensions have come under some criticism in the recent past, but as a pure investment they can be one of the most powerful tax savers while providing future sources of both capital and long-term income in retirement. 

For those paying the higher rates of tax (40 & 50%), relief on contributions can reduce income tax payable significantly, whilst providing the potential through Self Invested Personal Pensions for tax efficient investment in almost any asset (excluding residential property) worldwide.

Of particular interest, are those earning between £100,000 and £114,950 per annum who lose their personal allowance either partially or completely.  For these, a pension contribution could get their personal allowance back and save an effective rate of 60% tax in doing so.

Capital Gains Tax (CGT)
One personal allowance that is regularly ignored and yet has significant potential for tax savings is the CGT exemption. This allows us to make gains in the current tax year of up to £10,600 without liability to tax.

By purchasing assets that grow, rather than assets that produce interest or dividends, this growth can be regularly assessed and realised with the aim of utilising this exemption.

Through the use of growth-based unit trusts, or Exchange Traded Funds (ETFs), this exemption can produce a saving of up to £4,240 to a higher rate taxpayer replacing interest paying investments with those assessed under Capital Gains Tax.

Remember also, that the rate of CGT is only 18% for basic rate taxpayers and 28% for higher rate tax payers. Gifts between spouses and civil partners are exempt from Capital Gains Tax and it is therefore possible to transfer gains to a civil partner or spouse paying a lower rate of tax, to either utilise unused allowances or pay tax at the lower rate.

The perceived complexity of tax rules can be an area that puts off investors, but there is no doubt that with careful planning, significant savings can be made that have the effect of increasing investment returns at this difficult time.

The content of this article is generic and should not be construed as specific investment advice. Please contact us before proceeding with any course of action.

AFH Wealth Management is a trading style of AFH IFS Ltd which is authorised and regulated by the FSA. Past performance is not a guide to future performance.

The value of investments and the income derived from them may go down as well as up. Please contact a financial adviser before taking any further course of action.

For more details or to sign up for the AFH e-newsletter, visit http://www.afhwm.co.uk

Austin Broad is Technical Director at AFH Wealth Management.

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