With weeks left until the end of the tax year, many experienced investors will have completed their tax year end routine by now: ISAs (maybe for the whole family), pensions (if not caught up by the allowance cuts) and crystallising any capital gains.
But what if after all that you’re still looking at quite a sizeable tax bill?
Alex Davies, CEO and founder of Wealth Club, the UK’s largest broker of tax-efficient investments, reveals three things experienced investors (who are prepared to take greater risk) should consider in the last few days of the tax year:
1. Look beyond pensions and ISAs to save up to 50% income and capital gains tax
Pensions and ISAs are great, but the allowances can be restrictive for some. To mitigate this, if you’re prepared to take extra risk, you could look to the government’s venture capital schemes. Each offers a different mix of tax benefits. Which you go for will largely depend on circumstances and how much risk you’re prepared to take. As a rule of thumb, the greater the tax benefits, the higher the risk.
- Venture Capital Trusts (VCTs) offer up to 30% income tax relief. Returns are paid through regular tax-free dividends, which is a nice bonus. The allowance is a very respectable £200,000 a year.
- Enterprise Investment Scheme (EIS) investments also offer up to 30% income tax relief. There are no tax-free dividends, but one bonus here is that you can also defer chargeable capital gains you’ve realised. For as long as you stay invested in any EIS, you can forget about the CGT bill. It will only become payable once you come out of the EIS, unless you re-invest the money into another. The allowance is a whopping £1 million a year or £2 million if you invest at least £1 million into “knowledge intensive” companies.
- The Seed Enterprise Investment Scheme (SEIS) is the real winner when it comes to tax savings. When you invest you can cut both your income and capital gains tax in half. The allowance is more modest but still sizeable at £100,000. But that probably doesn’t matter too much when you consider a £100,000 investment could save you up to £50,000 income tax plus £14,000 capital gains tax.
2. Get back tax you’ve already paid
A valuable but often overlooked perk of EIS and SEIS investments (but not VCTs) is they allow ‘carry back’. As the name suggests, this means you can choose to offset the tax relief against the previous tax year and get back tax already paid.
However, there is a catch. To be able to carry back to 2020/21 tax year, your money must be invested – and the shares allotted – by 5 April 2022. If this deadline is not met, you don’t have the option to carry back, but of course can still offset the tax relief against the current tax year.
3. Protect your ISA from IHT
Pensions can be passed on to the next generation relatively tax efficiently. EIS and SEIS investments should be IHT free after two years too.
The greatest IHT threat probably comes from where you least expect it: your ISA. Contrary to what many think, ISAs are not IHT free. So, if you do nothing, up to 40% of your fund could eventually be eaten up by tax.
Spending your ISA might be fun, but probably not what you had in mind when you were saving into it. An alternative is to invest in an AIM ISA, a managed portfolio of AIM shares that can be IHT free after two years. You still get the ISA benefits of tax-free income and growth for as long as you live, but you don’t need to worry about IHT on top.
The most important thing of all
If you’re planning to do anything this tax year and you spot an investment opportunity you like now is the time to act. Delay even by a couple of days and you might find your options are limited.
Popular VCTs are filling up fast and many have already closed. The deadlines for EIS investments allotting this tax year are also looming.
|How do ISA, pensions, VCT, EIS and SEIS tax reliefs compare?|
|Maximum Investment||Income Tax Relief||CGT Relief/Deferral||Tax-free dividends||Tax-free growth||IHT relief||Loss relief|
|AIM ISA||£20,000||No||No||Yes||Yes||Yes (after two years)||No|
|Pension||£0 to £40,000*||up to 45%||No||Yes||Yes||Yes||No|
|VCT||£200,000||up to 30%||No||Yes||Yes||No||No|
|EIS||£2,000,000**||up to 30%||Deferral||No||Yes||Yes (after two years)||Yes|
|SEIS||£100,000||up to 50%||50% relief||No||Yes||Yes (after two years)||Yes|
*Depending on circumstances. Broadly based on total pension value and income in the tax year. UK rates excluding Scotland.
**Invest up to £1m per tax year or up to £2m if anything above £1m is invested in Knowledge Intensive companies.