Tax Year-End: VCTs and tax mitigation

Where an investor is more adventurous and interested in the significant tax rebates available from HMRC, I favour Venture Capital Trusts (VCTs) over Enterprise Investment Schemes (EIS).

They are both higher risk than typical equity -based funds as they invest in smaller, relatively new companies. Simply put, a VCT is an investment trust comprising a number of different investments, and an EIS is typically just a single investment. It’s an eggs and baskets thing for me – an EIS requires a greater leap of faith.

The tax breaks on VCTs are significant. Provided they are held for the qualifying term (5 years) they offer 30% tax rebate based on the amount you invest (invest £100k, get £30k reduction on your current year’s tax bill – but you must have incurred that much income tax in that tax year in order to benefit) – and all income streams – dividends and capital gains, are tax free.

Innovative providers of VCTs have designed “lower risk” limited life offerings which are designed to liquidate after the qualifying period is up (in practice this is around a 6 year cycle). They invest mainly in asset-backed businesses (e.g. those with significant real estate) and/or those with predictable income streams. Staying within the rules, they  offer fairly modest gross returns whilst mitigating risk as far as they can. When added to the 30% initial tax saving, the IRR on such investments might for example be 7% to 9% for a higher rate taxpayer. After liquidation, the funds can be re-invested again and obtain a further tax rebates. Limited Life VCTs also avoid the criticism levied against traditional VCTs – where encashment is nearly always at a discount price compared to net asset value. A limited life VCT liquidates, so the investor receives full NAV.

But for those who like to buy and hold, then “Evergreen” VCTs can offer more risky but often more rewarding returns, with no tax on the income streams from year to year.

There is a VCT “season which commences in December each year and carries on past the tax year-end, offering investment in one or both tax years for a particular offering. Up to £200,000 per tax year means a maximum of £400k can be invested across the tax year-end. Minimum investments are usually £5,000 to £10,000.

If you would like to hear more about VCTs, please contact me.

Tax Year-End: Capital Gains considerations

Just a quick note to remind those of you with non-ISA investments that just because you haven’t earned crystallised  capital gains in excess of your annual CGT allowance (£11,000 in 2014-15) doesn’t mean you can ignore the planning. The markets have been pretty good over the past few years and many non-ISA investors will have holdings “pregnant” with potentially taxable gains.

And this applies to trustees too – your CGT allowance is 50% of the personal allowance at £5,500.

Unless your investments are modest, my advice is to try and crystallise gains up to just under your annual allowance, so that your portfolio is no longer carrying those gains into a later year, when future sales may cause aggregate gains over the allowance and tax becomes payable.

Even where you do not wish to make any wholesale changes to your investments, it is possible to swap one share (or fund) for another which is very similar. For example, swapping one UK tracker fund for another. This crystallises the gain into the current tax year.

Or maybe you have brought forward capital losses from earlier tax years. Can you utilise them against current gains in an efficient manner?

No reporting of capital gains under the annual allowance is required on a self-assessment tax return to HMRC.

Just sensible housekeeping really 🙂

Tax Year-End: Capped Drawdown plans have one big advantage over their Flexible new friends, but will disappear April 5th 2015

In all the hype over the new pensions rules and flexibility beginning next April, it is easy to miss the rules concerning contribution allowances whilst in drawdown.

There can be reasons and/or advantages to an individual in running a drawdown arrangement and taking income from it whilst simultaneously making contributions (or keeping the option to make future contributions). Care needs to be taken not to fall foul of rules prohibiting the recycling of tax-free cash.

Existing capped drawdown plans which are maintained within their GAD withdrawal limits will retain the annual allowance for further contributions of £40,000, whereas an active flexible plan will have a reduced allowance of £10,000 after April 5th 2015. However, capped Drawdown will no longer be an option after April 2015, when all new drawdown plans will qualify as “flexible” regardless of withdrawal levels. After April 5th, as soon as a “trigger” event occurs, such as taking income or cashing in a small pension in its entirety, the new reduced annual allowance of £10,000 applies.

So, investors wishing to carry on an active drawdown arrangement yet take advantage of the £40,000 contributions limit in future, who do not currently have such a plan,  would need to quickly set up a plan (and make a crystallisation event – e.g. a small withdrawal of tax free cash) prior to April 2015, to be able keep that greater level of annual contribution allowance.

To maintain the £40,000 limit going forward, capped drawdown members must not exceed their GAD income limits in any tax year. To do so creates an event which triggers the smaller contributions allowance going forward.

This is an area where financial advice is essential – in fact drawdown plan providers will generally only deal with you through an adviser(!)

Most new drawdown plans are initiated via a transfer of existing pension money from one or more other pension plans, but in view of the rapidly closing window (realistically you’d need to get a new application in by around March 20th at the very latest),  for a capped plan I would suggest the time for that is already past. However, if you have a reasonable cash lump sum which you can contribute now, then it may still be possible to find a capped drawdown provider and set the account up with instant crystallisation.

NB the above is a brief summary only – we will advise on pertinent rules as appropriate. If you think this sounds suitable for you, we’re happy to advise further – just give us a call on 0345 013 6525 to discuss.

Tax Year-End: Do you want to make more than £40,000 pension contributions this year? – Carry Forward!

The annual allowance for pension contributions in 2014-15 is £40,000, which is the gross equivalent and includes all contributions from all sources (i.e. incl. employer contributions). Unused allowances from the previous three years may be carried forward and used in the current tax year.  (You need to have been a member of any UK pension scheme in a given tax year to qualify for the contribution allowance in that year).

Carry forward of pension annual allowances can have its intricacies, but basically you must first use the current year’s and then work backwards. All of the tax relief obtained is applied against current year’s income. The annual allowance was £50,000 in each of 2011-12, 2012-13 and 2013-14 (so potentially an individual could pay up to £190,000 into pensions in the current tax year).

Please give me a call if you are interested in any last minute lump sums into pensions.

Tax Year-End: ISA Allowances

OK they’re apparently “NISAs” following the latest upgrades, but I’m sticking to the old name for now.

This is pretty straight-forward stuff. You must use your ISA allowance in its tax year, or else it is lost. You must be over 16 for a cash ISA, or over 18 for “Stocks and Shares” ISAs (typically unit trusts or similar mutual funds).

The allowances are:

  • 2014-15 (up to)£15,000 each
  • 2015-16:(up to) £15,240 each

From 2014-15, you can invest any proportion into cash or Stocks and Shares – e.g. you can now invest £15,000 into just a cash ISA, or  £15,000 into Stocks and Shares ISA, or anything in between.

A married couple could invest £60,480 across both tax years. Most of the larger ISA providers will facilitate a double payment now – (they just hold next year’s part of the payment for a week or two and the invest it for you on April 6th).

(Junior ISAs apply for younger people, which have lower allowances than for adults – see  earlier posts).

made-it

Made It!

If you leave it to the last minute and are having difficulty with your provider, or you’d like to set up a new ISA account this year, please give me a call. We have last minute facilities with most of the big platforms (Fidelity, Old Mutual, Cofunds etc.) where we can get your application in. And don’t forget we offer an investment advice service – customised portfolios built around your preferences. Our on-going fee for this service is just 0.5% per year.

Tax Year-End: Avoiding the 60% tax band!

For those of you earning over £100,000 this tax year, remember that for every £2 of income earned over £100,000 an individual loses £1 of their personal allowance until they have no allowance left.

This makes the effective rate of tax 60% on income between £100,000 and £120,000 for 2014/15. (40% tax on the £2 (80p) plus 40% tax on the lost £1 allowance (40p) = £1.20 tax on £2).

So when your income is over £120,000 all the personal allowance is lost as this is double the personal allowance.

The measure of £100,000 is the ‘adjusted net income’. Broadly, this is total taxable income less certain deductions e.g. gift aid donations and gross personal pension contributions.

The Plan

You can get your adjusted net income back down below the £100,000 if you can make a lump sum pension contribution of a suitable size:

  • Identify total income for personal allowance purposes i.e. adjusted net income
  • Calculate excess over £100,000 limit
  • Calculate contribution to reduce adjusted net income to £100,000
  • Make the personal pension contribution in the tax year in which the personal allowance is lost.

Example

Mr Savvy has income of £110,000 so has lost some of his personal allowance. A personal pension contribution of £8,000 net, £10,000 gross is made.

pension-graphic

So, the contribution has the dual impact of increasing the amount of tax free income through the reclaimed allowance as well as pushing out the basic rate band.

For a resulting net spend of £4,000 Mr Savvy has reduced his tax bill by £6,000 and generated a £10,000 into his pension pot.

The contribution of £10,000 has saved £4,000 in tax and received relief in the pension of £2,000 – an effective rate of tax relief of 60%!