Insights

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?

1. Put the maximum allowable into your ISA

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.

2. Invest in early stage start up companies

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.

3. Buy shares in your employing company

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:

• EMI share schemes can be very tax efficient enabling employees to acquire options to buy shares at an agreed price on a future date.

• Share incentive plans (SIPs), or share save (SAYE) schemes have maximum investment amounts and minimum holding periods.

• Employees with SIPs can contribute up to £3,600 a year from gross pay without incurring tax and NICs. For SAYE schemes, the limit is £500 a month from net pay.

• Once these shares are sold, they will attract CGT (currently either 10 or 18%) rather than income tax.

4. Invest in an AIM listed or unquoted company

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.

5. Invest in venture capital trusts

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.

6. Invest in small companies via crowdfunding

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.

7. Investing in a social enterprise

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.

8. Fine wine, classic cars and woodland

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