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There are still a few weeks left of the 2016/17 tax year, which means there is still time to mitigate the amount of tax you will have to pay in January 2018. From wine to property to start ups, what options are available to consider if you have excess income and wish to shelter income from tax?
This one is easy. Subject to having the funds available, it is possible for a family of four to shelter up to £38,640 in an ISA between now and 5 April; whilst for adults the maximum contribution is £15,240 per person, contributions of up to £4,080 per child can be made to a junior ISA
Depending on your circumstances, you may have adult children interested in buying their first property. In this instance, funds can be gifted directly into a Help-to-Buy ISA on their behalf. This opportunity is available for the next 4 years for first time buyers only.
An additional scheme is available whereby individuals aged over 16 can save up to £200 per month, to which the Government will add a 25% tax-free bonus, (from a minimum amount of £400 up to a maximum of £3,000 on £12,000 of savings) when the funds are used to buy their first property.
It is always risky to invest in start up companies but the government has made the tax incentives quite tempting. For people who have taken appropriate advice, fully understand the risks and have the means to make riskier investments, this can be a very tax efficient strategy. Any individual can invest up to £100,000 in a qualifying company through the Seed Enterprise Investment Scheme (SEIS), with the ability to claim income tax relief at 50% regardless of their marginal rate of tax.
If you have more than £100,000 in funds available and did not use your 2015/16 SEIS investment allowance, it can still be used in this current tax year. The investment amount is simply carried back and relieved as if it was made in 2015/16. If the SEIS investment results in a loss, this loss can be offset against future income.
If your employer offers you the chance to buy shares in the company at a discount, with favourable tax treatment, this can be a great way to make a tax efficient investment in a company in which you can influence growth. But as with everything, it needs careful planning and investment advice.
There are a wide range of tax advantaged company share schemes available and each has its own rules, and pros and cons. For example:
As an alternative to investing in a start up, you can also obtain tax reliefs by investing in unquoted or AIM listed companies through EIS. As with SEIS this is an option if you have sufficient income to shelter, understand all the risks and have taken specialist advice.
You are able to invest up to £1million in a qualifying EIS company during the 2016/17 tax year, which will attract 30% income tax relief provided you have sufficient income and the shares are held for at least 3 years. If you are married or in a civil partnership, you will each have individual allowances and can invest up to £2million. Qualifying EIS shares are exempt from capital gains tax on sale, and capital gains tax arising on gains made on the sale of other assets can be deferred if the proceeds are reinvested into EIS shares.
Buying units in venture capital trusts (VCTs) is another option offering tax benefits and this operates differently to EIS and SEIS investments. Provided you understand the risks involved and have funds available, it’s possible to receive 30% income tax relief on qualifying investments of up to £200,000 for 2016/17. In addition, a VCT can buy and sell investments without suffering CGT within the trust and there is no CGT payable on any gain made when you sell the VCT units.
Another risky but tax efficient option which will suit a wider range of taxpayers is crowdfunding investing, also known as peer-to-peer lending. In this case, it is also possible to make investments within a special ISA, the Innovative Finance ISA, (IFISA) and any income or gains generated within the IFISA are tax free. If you are interested in IFISA investing, be aware that there are greater risks associated with this route than an ordinary ISA although the potential returns may be greater. Any contributions will count towards your total annual ISA allowance of £15,240 for 2016/17.
Buying shares or investing in a qualifying social enterprise attracts social investment tax reliefs (SITR). The sums involved are on a par with those offered to SEIS and EIS investors. That is, up to £1m a year can be invested, to attract 30% income tax relief.
A range of qualifying conditions must to be met by the social enterprise for the investor to get the tax relief available. For instance, it’s only open to social enterprises up to a certain size limit and you must invest for at least three years.
Relief from CGT is also available where disposal proceeds are reinvested in a social enterprise.
If you have available funds and wish to make charitable donations, an investment through the social investment scheme may be more tax efficient. You need to weigh up whether you can benefit from capital gains tax deferral at 20%, income tax relief at 30% and future exemption from inheritance tax (using business property relief in the case of shares) plus have the benefit of a residual asset. By way of contrast, the maximum relief for gift aid payments is 45% and there is no residual asset.
Looking for something a bit different? Other investments offer tax advantages.
Personal motor vehicles are currently exempt from CGT when sold, so investing in classic and vintage cars can yield tax free gains.
Provided you have the right level of willpower, wine also a tax efficient investment. It is classified as a tax exempt wasting asset and if you keep it long enough and the vintage increases in value, any profits will be tax free.
However, there are caveats to consider with these two investment types; in the case of wines and cars, any losses incurred cannot be offset against other gains.
Investing in woodlands can also be tax-efficient but is a longer term strategy. In this case income tax relief is not available on investment, but capital gains can be reinvested in woodlands and rolled over until the land is eventually sold.
For more ideas to reduce your 2016/2017 tax bill, read our other blogs sharing valuable tax planning tips.
Alternatively, get in touch with us directly by emailing partners@rjp.co.uk
I wanted to write and express our gratitude for your help and hard work in getting Probate through and settling all the taxes. I am so pleased that we selected RJP, as your professional help and updates throughout this process have been invaluable. If at any time in the future Probate assessment may be needed, you will be our first port of call. Once again, many thanks to the whole team.
Dan Cook, Probate clientI just wanted to drop you a short note to say how grateful I am for the support that RJP has provided over the past 4 weeks while our Financial Controller was away. I struggle to comprehend how much work your staff get through during their weekly visits and they are always a pleasure to have around the office.
I Evans, CFO, MoblicitiJust a quick e-mail from me to thank you for achieving the target for producing the draft accounts – it is very much appreciated and gives a first class impression of your firm. Many thanks.
J Stanfield, Chairman, BBS Actuaries LtdI would like to take this opportunity to thank you very much for the amazing job you have done navigating us through this whole process. My family and I also really appreciate the care and compassion demonstrated by you and your team in every dealing. Our thanks to everyone.
M Goldsmith, Probate ClientRJP provide our company with a complete service which takes the stress and strain away from the day to day running of our accounts! Their understanding of our business and their patience and advice is invaluable.
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If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.