Tax free savings Tax Tip Don’t forget to use the dividend and savings allowances. These allowances tax £500 of dividends and up to £1,000 of savings income at 0%. Individual Savings Accounts (ISAs) ISAs are free of income tax and CGT. There are maximum investment limits which apply for each tax year but, over several years, large investments can be built up. The overall annual ISA savings limit is £20,000. Investors can choose to invest in a cash ISA, stocks and shares ISA or an Innovative Finance ISA as long as they do not exceed the investment limit. Lifetime ISA The Lifetime ISA is available to adults aged between 18 and 40. Individuals are able to contribute up to £4,000 per year and receive a 25% bonus from the government (up to £1,000). If £4,000 is invested, the investment limit for the other types of ISAs falls to £16,000. Funds, including the government bonus, can be used to buy a first home worth up to £450,000 at any time from 12 months after the first subscription or can be withdrawn from age 60 completely tax-free. Other tax efficient investments The following investments work in varying ways. You should consider your needs in detail before entering into any commitments.
National Savings and Investment premium bonds Premium bonds are tax free and you could win £1 million. However, the annual rate of return is not predictable. Single premium insurance bonds The growth on insurance bonds is taxed at 20% and paid directly out of the bond. For a higher rate taxpayer bonds provide a means of deferring income into a subsequent period when it may be taxed at a lower rate. Withdrawals of up to 5% of the original investment can be made each year without incurring an immediate tax charge. Complex tax reliefs can be available on withdrawal or on maturity of the bonds. Please consider taking advice on the implications prior to making withdrawals in excess of the annual 5% limit and on maturity. Venture Capital Trusts (VCT) These bodies mainly invest in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends and on any capital gain arising from disposal of the shares in the VCT (note limits apply where large investments have been made in any one tax year). Income tax relief of 30% is available on subscriptions for VCT shares, up to £200,000 per tax year, as long as the shares continue to be held for at least five years. The Enterprise Investment Scheme (EIS) The tax reliefs for EIS investors are: • Income tax relief at 30% is available on new equity investment (in qualifying unquoted trading companies) of up to £1 million. A higher limit of
£2 million may apply to investments in ‘knowledge intensive companies’. • A CGT exemption on sales of EIS shares held for at least three years. • If the gain on the sale of any chargeable asset (eg quoted shares, second homes, etc) is reinvested in EIS shares, the gain on the disposal can be deferred. Seed Enterprise Investment Scheme (SEIS) The tax reliefs for SEIS investors are: Income tax relief at 50% in respect of qualifying SEIS shares up to an annual maximum investment (in all SEIS companies) of £200,000. • A CGT exemption where SEIS shares are sold more than three years after they are issued (as for EIS). • A further CGT exemption of 50% where an individual makes a capital gain and reinvests the gain in qualifying SEIS shares. Note this is an exemption rather than a deferral as for EIS.
Tax and Your Investments
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