Investment Reliefs 2010/11 - Cutter & Co Chartered Accountants

Investment Relief

The main tax incentives for investment are:

income tax deduction for amounts invested – the rebate is either at a fixed 20%/30% or at the taxpayer’s marginal rate of tax (given by deduction from income – DED’N in tables below)
tax exemption on the income from the source (EXINC)
tax exemption on gains arising (EXGAIN)
the ability to defer capital gains on other disposals until the new investment is sold (DEFER)

The main types of tax-advantaged investments are:

ISA (individual savings account)

DED’N	EXINC	EXGAIN	DEFER
No	Yes	Yes	No

Investment can be made in ‘cash ISA’ (up to £5,100pa) and/or ‘stocks and shares ISA’ (£10,200pa less amount invested in cash). No restriction on withdrawal. No relief for losses.

VCT (venture capital trust)

DED’N	EXINC	EXGAIN	DEFER
30%	Yes	Yes	Not since 5/4/04

Deduction relief is for subscription for new share capital in approved VCT – a quoted company which invests in small, unquoted trading companies. The income tax relief becomes permanent if the shares are held for 5 years. Income and gains (if any) are exempt immediately even for second-hand shares. No relief for losses. Maximum investment £200,000 pa.

EIS (enterprise investment scheme)

DED’N	EXINC	EXGAIN	DEFER
20%	No	Yes	Yes

Relief is for subscription for new share capital in small, unquoted trading companies. The income tax relief becomes permanent, and gains are exempt, if the shares are held for 3 years. Further relief available for losses on disposal. Maximum investment £500,000 per tax year for DED’N and EXGAIN; only limit for DEFER is size of qualifying company.

PPP (personal/stakeholder pension plan)

DED’N	EXINC	EXGAIN	DEFER
Marginal	Yes	Yes	No

The details of the contract with the pension company may vary, but they must be within the basic framework set down by tax law.

PPP premiums are paid net of basic rate tax. The policyholder pays 80% and the HMRC pay 20%. Higher rate relief is given where due by increasing the basic rate band in the tax computation, resulting in reduced self-assessment payments or in increased PAYE code for employees.

While the money is held within the pension fund, it is exempt from taxes on income and gains, so it grows faster than funds held directly.

When the policyholder takes the benefits under the scheme, 25% of the accumulated fund can be drawn as a tax-free lump sum, and the balance is used to provide an income (which is taxable). The income can be a purchased annuity for life, or an “alternatively secured pension” in which the fund is still identified and produces the income which is paid to the pensioner.

Tax relief is due on an individual’s gross contributions up to £3,600 (£2,880 net), or 100% of current year employed or self-employed earnings if higher, up to £255,000 (in 2010/11). However, relief may be restricted for those earning over £130,000 in 2011/12. To prevent “forestalling”, large extra contributions by high earners in 2009/10 and 2010/11 may also suffer a restriction.

When a policyholder takes benefits, the capital value on which benefits are drawn (e.g. as a 25% tax-free lump sum plus an annuity based on the other 75% of the fund) are measured against a “lifetime allowance” (£1.8m in 2010/11). If the lifetime allowance is exceeded, there is a clawback charge on the excess.

Employers can contribute up to £255,000 to employees’ pension funds, less any contributions made by the individual. The employer can enjoy tax relief on the cost under the normal rules for trading expenses.

If a policyholder dies before taking any benefit under the scheme, the fund usually passes to dependants free of IHT. If death is during payment of benefits and a capital fund is payable to dependants, it is likely to be subject to IHT.