The wonderful world of tax efficient investment schemes

May 9, 2018 | Tony Byrne's View

Did you know there is a plethora of amazingly tax efficient investment schemes in the UK today but like the proverbial scorpion there is a sting in the tail for the uninformed and ignorant investor? The investments I am going to concentrate on here are what are known as esoteric tax efficient investment schemes which means they are not common, not in the mainstream.

We have a saying here at Wealth And Tax Management “Don’t Let the tax tail wag the investment dog” meaning don’t be led by the tax breaks of an investment, be led by its investment credibility first. If it is a plausible, credible and understandable investment. If it makes sense. If you have researched it and you are convinced by it, by all means invest in it bearing in mind that such investments do carry a higher level of investment risk.

Let me start by listing some of the most popular of these investments. This is by no means an exhaustive list.

Enterprise Investment Scheme (EIS)
Seed EIS (SEIS)
Venture Capital Trust (VCT)
Business Relief qualifying investments
Inheritance Tax Schemes (ITS)
AIM ISAs

Within the limitations of this blog I do not have the scope to detail the tax efficiency of all of these investments so I will briefly summarise some of the main benefits instead.

EIS gives 30% Income Tax relief up to £1m, is free of Capital Gains Tax, CGT, and Inheritance Tax (after 2 years). In addition to this you have the ability to defer Capital Gains Tax on gains made elsewhere!

Seed EIS is even more generous with 50% Income Tax relief up to £100K. 50% of capital gains made elsewhere may be re-invested into SEIS to claim reinvestment relief which means deferment of the CGT liability until the SEIS is eventually sold. Like EIS the investment is free of CGT and IHT (after 2 years).

Both EIS and SEIS investments can be carried back one tax year.

Venture Capital Trusts have less tax benefits than EIS and SEIS but have the advantage of investing in larger companies and are more liquid, in other words, are more easily sellable because many of them are quoted on the AIM stockmarket.

Business relief qualifying investments including ITS schemes have the advantage that they qualify for 100% exemption from Inheritance Tax after 2 years of ownership yet still allow you access to both capital and income in the meantime.

AIM ISAs also qualify for 100% Business Relief after 2 years of investment. This means that such ISAs become 100% free of all taxes after 2 years and are Income Tax and Capital Gains Tax free in the meantime!

In spite of their fantastic tax savings these investments have to be described as higher risk because a) they invest in smaller companies and b) there is no investor compensation available under the Financial Services Compensation Scheme or FSCS for short.

We would not recommend that a client invest more than 10% of his/her investable assets into esoteric tax efficient investments and even then he/she must be prepared to accept the higher level of risk which means that some of these investments may fail.

We are also great advocates for spreading your investment risk when investing in such schemes so we highly recommend a pooled approach by diversifying your investment over a wide spread of schemes. The old adage about not having all of your eggs in one basket is particularly pertinent when it comes to esoteric tax efficient investment schemes!

Do not ignore the more conventional tax efficient investments such as pensions, ISAs, onshore and offshore investment bonds etc. You should focus on these more mainstream investments first and only invest in esoteric tax efficient investment schemes once you have maximised your allowances in these investments.

So if you would like advice on how to invest your money as tax efficiently as possible and in a way that minimises your risk, why not get in touch with us for an investment consultation? You know it makes sense.

 

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