To many of us, 10% seems a fair tax rate. Where a capital gain qualifies for entrepreneurs’ relief, it is difficult to begrudge HM Treasury’s 10% tax take. But the much higher rates of tax on income (up to 47%) or other capital gains (up to 28%) can be hard to stomach when you bring in extra money from a good year’s profit or an asset disposal.
The tax costs can be eliminated by investing your windfall tax efficiently. For example:
- Pension contributions. The facility since 2015 to withdraw pension fund capital from age 55 (albeit mostly subject to income tax) makes pensions much more attractive as a personal savings vehicle. Depending on your circumstances, your limit for full income tax relief on pension contributions in the current tax year could be between £3,600 and 160,000. If your company makes the payment, National Insurance will be saved too.
- Enterprise investment scheme (EIS). An EIS investment can achieve an initial tax saving of up to 58% – comprising a 30% income tax credit and the deferral of capital gains Tax (CGT) on other asset disposals. If the EIS is sold after 3 years, any gain on the EIS will be tax-free. And if it is retained, it will usually qualify for IHT Business Property Relief.
- Venture capital trust (VCT). VCT investments no longer achieve CGT deferral but they do benefit from a 30% income tax credit up front and CGT exemption on a disposal after the minimum 5 year holding period.
A word of warning, however: pension investments can be low risk and suitable for (almost) everyone, but the investment risks with VCTs and EISs are much higher. You must consult an IFA about the investment suitability for you, and avoid being swayed solely by the tax advantages.
For further advice on eliminating your tax costs, please contact us on 01392 211 233.