While many clients choose to complete much of their tax planning in Q1, the start of the new tax year would, for many, be a better time to start thinking about planning.
This year we have the New Individual Savings Account (Nisa), allowing contributions of up to £15,000 a year, and reduced pension limits – all of which will change the complexion of tax-efficient saving as the year progresses.
For many clients making sure they have maximised their Isa and pension contributions will be the extent of their tax-efficient saving. For others – particularly wealthier clients who cannot put as much as they used to into pensions – other tax-advantaged investments will become part of their planning mix.
In recent years, an increasing number of people have chosen to incorporate the enterprise investment scheme (EIS) as part of their response to higher levels of personal taxation. There are merits in starting EIS planning earlier in the tax year. This can be either as a stand-alone investment, or as part of a wider strategy involving Isas, pension contributions and other investments.
Enhancing returns
When considering an EIS, there is a tendency for clients to focus on its tax benefits, rather than the potential to achieve growth on the underlying investment. If you were to put the tax benefits to one side, getting the money working earlier can enhance returns.
Bring forward the ‘exit’ opportunity
A consequence of investing sooner is that it may provide clients with the opportunity to achieve an earlier ‘exit’. To qualify for a number of the tax reliefs provided by an EIS, the investment must be held for at least three years.
Receive your tax certificate before having to pay a tax liability
One of the key attractions of an EIS is the ability to reclaim tax already paid. However, with early planning it may be possible, in certain circumstances, to avoid paying the tax in the first place. In order to claim the tax relief, clients must be in possession of a tax certificate (EIS3 or EIS5). By investing earlier, you increase the chances of the client receiving their certificate before the tax needs to be paid.
Enjoy freedom from IHT in just two years
If part of the reason for investing into an EIS is to benefit from the IHT shelter they provide, delaying an investment until the end of the tax year could result in the two-year qualification period starting up to 11 months later.
Remove the risk of offers closing
Many EISs seek to raise a predetermined amount of money and, once this has been raised, the offer will close. Where demand is high, this may occur earlier than anticipated, resulting in clients having to seek alternative arrangement.
Sale of an investment property
On the sale of an investment property, capital gains tax will be paid on the gain in excess of the annual exemption available (or any carried forward losses). As the gain will be known at the time of the transaction, it is possible to arrange an EIS to defer the amount of the gain that is chargeable to tax.
The disposal of shares
Although the sale of shares can be phased over a period, so as to manage any tax liability over a number of tax years, this will result in shares being held for longer. In contrast, at an investment level, having made the decision to sell a share holding, it is often preferable to sell all the shares as soon as possible. Like with the sale of an investment property, an EIS provides the opportunity to defer any capital gain arising on the sale of shares.
Surrendering a single premium investment bond
Unlike other forms of investment, the surrender of a single premium investment bond will typically result in an income tax liability. With income tax relief available at 30 per cent on the amount invested into an EIS, should the surrender result in a £30,000 income tax liability, an investment of £100,000 into EIS would mitigate this in full. Unlike capital gains, the income tax liability is removed in full, provided the investment is held for at least three years.
To misappropriate an old slogan ‘tax planning is for life, not just for the Isa season’. For many clients, tax planning should not start just after Christmas, but on April 6 annually instead. This will give plenty of time to plan a clear strategy involving Isas, pension contributions, EISs and other tax-advantaged investment solutions.
Simon Ruthers is manager, private clients at Oxford Capital
