Tax-free investment possibilities in the UK include individual savings accounts, venture capital trusts, the enterprise investment scheme and community investment tax relief. These offer various tax advantages including relief from income tax and capital gains tax. The choice of which investment vehicle to use may depend on the investor's tax position, appetite for risk and the required return.
Individual savings accounts
Individual savings accounts (ISAs) give investors a chance to save with a financial institution and to receive interest free of tax. These accounts are available to anyone who is aged over 16 years, and who is a resident or ordinarily resident in the UK. A maximum contribution of £10,680 into an ISA can be made in 2011/12, and £5,340 of this may be contributed to a cash ISA. Any interest and dividends received from the ISA investments are tax-free, as are any capital gains received, for example from a shares ISA. Since 01.11.11, anyone aged under 18 years old who does not have a Child Trust Fund may open a Junior ISA containing cash or shares and make tax savings. The contribution limit is £3,600 per year.
Enterprise Investment Scheme
A riskier investment in small trading companies is available under the Enterprise Investment Scheme (EIS). Any capital gain made on EIS shares is exempt from capital gains tax, while a capital loss on EIS shares may be offset against the taxpayer’s income tax liability. A taxpayer may defer capital gains on other assets by rolling them against the investment in EIS shares. From 05 .04.11, an investor may obtain an income tax relief of 30% of the amount of the investment in EIS shares, up to a maximum investment of £500,000. To qualify for the tax relief, the investor must hold the shares for at least three years. The maximum EIS investment is to increase to £1 million in April 2012.
Venture Capital Trust
Another investment with higher risk is to subscribe for shares in a Venture Capital Trust (VCT), which makes investments in small start-up enterprises. Income tax relief of 30% is available on the amount invested, up to a maximum of £200,000. The VCT’s income is tax-free, and any capital gain made by the taxpayer on selling the VCT shares is tax exempt if the shares are held for at least three years.
Community development tax relief
Community investment tax relief allows investors to obtain tax relief of five percent for up to five years on loans or equity investments in a Community Development Finance Institution (CDFI). A CDFI may be a community loan fund, microfinance fund or social bank lending to organisations and businesses that have a social or environmental purpose. Source HM Revenue and Customs' website: Mrc.gov.uk