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As the new tax year gets underway, you might be considering how you could be more proactive in taking advantage of different tax reliefs and tax advantaged investment opportunities available. Since personal allowances have been frozen and some taxes are increasing, it’s worth reviewing your tax profile. There are many proactive tax planning options to consider; depending on your income and your attitude to risk, some will be more attractive than others.
Tips for proactive tax planning
Here are some options:
VCTs are a good example of tax advantaged investments that have enjoyed a surge in popularity recently. Reports show that over £700 million was invested in VCTs during 2022. The increased interest in VCTs has arisen partly due to previous restrictions to the amount of money that could be invested tax efficiently into a personal pension – both annually and over a lifetime. These rules have now been relaxed and it will be interesting to see if the relaxation affects interest in VCTs going forward.
How do VCTs work?
Venture capital trusts (VCTs) are listed investment vehicles that provide finance to smaller, start up and privately owned companies. The amount of money that can be invested each year by a taxpayer into a VCT was recently increased to £200,000. VCTs are usually higher risk than other investments, but they offer significant tax breaks if you have the surplus income to warrant investing in one and are comfortable with their higher risk profile.
VCTs are very tax efficient; they attract income tax relief at 30% for those having sufficient income, and provided the shares are held for 5 years or more. Where payable, dividends and other gains from a VCT are tax free, which is another significant benefit, especially since the annual dividend tax allowances have been further reduced on other dividend income. Although risky, some very well-known brands were financed through VCT investments, such as Zoopla, Depop, Kazoo and Bought by Many.
There are other tax efficient options to consider in addition to VCTs, for example, through the Enterprise Investment Scheme (EIS) and the alternative for younger companies, Seed Enterprise Investment Scheme (SEIS). Both are also highly tax advantaged, with SEIS now offering some additional, enhanced features with effect from 6 April 2023.
How does SEIS work?
SEIS currently allows taxpayers to invest up to £200,000 per tax year into an approved company and claim 50% tax relief on the amount invested, i.e. an investment of £20,000 attracts tax relief of £10,000. It is also a high risk strategy, although the age of companies which can secure SEIS finance has increased from 2 years to 3, and the minimum holding period for an investment to qualify is 3 years as opposed to 5 years for VCTs. Companies that have already used SEIS to raise finance can secure fresh investment provided they do so within the 3-year time limit, so an individual taxpayer could repeat an investment. Other benefits of qualifying SEIS investments are that there is no capital gains tax to pay, gains can be rolled over into another investment to defer any tax payable, SEIS shares are IHT exempt and if an investment is loss making, the loss is tax deductible.
For taxpayers having a lower risk profile, there remains Individual Savings Accounts (ISAs) to consider and with interest rates now higher, the returns on ISA savings are greater. There are currently 4 types of ISA and the total amount an adult taxpayer can invest each year across all categories is £20,000 (£9,000 for minors). The money can be split across different types of ISA – cash, stocks and shares, innovative finance or the lifetime ISA – or put into one category only. For the Lifetime ISA only, the total annual investment per taxpayer is capped at £4,000. No tax is payable on either the interest earned on cash in an ISA or any income or capital gains from investments held within an ISA wrapper.
Finally, there are always pensions to consider. These are very tax efficient, although investments cannot be accessed as quickly as with ISAs, VCTs and EIS. Jeremy Hunt unveiled generous changes to pensions tax relief in the Spring Budget by raising the annual tax-free allowance on pension contributions to £60,000 and scrapping the lifetime cap on pension pots. Many taxpayers are now opting to take advantage of this change if they have the means to increase contributions.
The start of a new tax year is always a good time to review your tax profile and consider ways to reduce your tax liabilities. If you would like to discuss this further, please email partners@rjp.co.uk.
