Income Tax - tax efficient savings schemes
There are a number of savings and investment schemes that attract favourable tax treatment. However, the fact that tax relief could be obtained should not be the only factor taken into account when deciding whether to invest.
Individual Savings Accounts (ISAs)
An individual can invest up to £7,000 in an ISA in 2001/02 in a mixture of cash, life insurance and stocks and shares.
Up to £3,000 can be in cash and up to £1,000 can be put into a life insurance policy. The stocks and shares component can include equities, qualifying gilts, unit and investment trusts and open-ended investment companies (OEICs).
Income and gains in an ISA are generally tax-free and the 10% tax credit on dividends can be claimed by the ISA manager until 5 April 2004.
There are three types of ISA.
- Purchases of motor cars, except cars bought wholly for business purposes after 31 July 1995.
- Business entertainment expenses.
Withdrawals from an ISA do not affect the tax exemptions, but do affect the investment limit for the tax year. This means that once the maximum has been invested, no more investments can be made that year even if the funds have been withdrawn.
From 6 April 2001, 16 and 17 year-olds can invest up to ?3,000 a year in the cash component of an ISA. If the money comes from a parent, the tax benefits may be lost.
Withdrawals from an ISA do not affect the tax exemptions, but do affect the investment limit for the tax year. This means that once the maximum has been invested, no more investments can be made that year even if the funds have been withdrawn.
Tax Exempt Special Savings Accounts (TESSAs)
New TESSAs are no longer available but an individual can continue investing in a TESSA started before 6 April 1999. The maximum total investment is ?9,000 over five years, limited to not more than ?1,800 a year after the first. Interest earned is tax-free as long as the account is kept for five years and no more than the interest (net of notional 20% tax) is withdrawn.
Personal Equity Plans (PEPs)
No new contributions to PEPs can be made but existing PEPs can be held indefinitely and do not restrict investment in ISAs. Income and capital gains within a PEP are tax-free and dividend tax credits can be claimed up to 5 April 2004. PEPs can now include the same range of investments as the stocks and shares component of an ISA.
Enterprise Investment Scheme (EIS)
Investors can obtain tax relief at 20% on the cost of subscribing for shares in a qualifying unquoted company. The relief is limited to ?150,000 a year and is subject to several conditions. On a subsequent sale, any profit is tax-free although relief may be given for losses. An investment in EIS shares may also qualify for deferral of CGT on realised gains. This relief is not subject to the ?150,000 limit.
Venture Capital Trusts (VCTs)
Investors can obtain tax relief at 20% on up to ?100,000 of the amount subscribed by investing in a spread of unquoted companies through a VCT. The qualifying conditions and tax benefits for IT and CGT are similar to those for the EIS. In addition, dividend income is tax-free, although tax credits cannot be paid.
Enterprise Zone Investments (EZs)
Investment in new commercial buildings in an EZ attracts tax relief at the investor’s marginal tax rate. Relief is available only on the cost of the building, and not the land. Certain other costs may also be disallowed.
National Savings Certificates (NSCs)
National savings certificates are exempt from tax on their interest. They are available on a fixed interest or index-linked basis.