Advanced Tax Planning

Once you have utilised pension allowances and ISA limits and have the remainder of your financial programme established, you may wish to consider more speculative investments that offer excellent tax breaks. However it's important to realise that speculative investments mean that you should only invest what you can afford to lose!

Venture Capital Trusts

Venture Capital Trusts (VCTs) may be perceived as a higher risk investment, with portfolios consisting of unquoted companies, but their risks are counterbalanced by their tax advantages. Indeed, VCTs are now firmly established as an attractive means of combining tax efficiency and investment performance. What are their tax advantages? The tax advantages of VCTs are numerous:

  1. 30% income tax relief on investments of up to £100,000 per tax year for subscribers if held for five years;

  2. dividends from VCTs are free of income tax;

  3. there is an exemption from capital gains tax on the disposal of VCT shares; and

  4. VCTs do not pay corporation tax on chargeable gains or distributions from UK companies.
Enterprise Investment Schemes

Investing in EIS companies attract 30% income tax relief on an investment up to £1,000,000 in each tax year. The gains are tax free, and the minimum holding period to qualify for the tax rebate is 3 years. These schemes, although offering generous tax relief, are speculative investments and not necessarily the first step in financial planning.

Film Partnerships

Recent legislative changes have meant there are not many of these schemes available. There are still however opportunities to invest in UK films and receive generous tax incentives.

Commercial Property Schemes / Enterprise Zone Trusts

There are opportunities to invest in commercial property and take advantage of generous tax reliefs. Again some of these investment schemes are deemed high risk and you could lose your tax relief and your investment.

Investing in the AIM market

Investing in the Alternative Investment Market (AIM) market is an excelent way of reducing an inheritance tax (IHT) liability.

Operated by the London Stock Exchange, AIM is a market for growing businesses, most of which have a market capitalisation of under £100 million. Majestic Wine and Domino Pizza are both AIM listed companies, so it’s not just small high risk companies that it was originally associated with when it first came into existence.

HM Revenue & Customs has afforded AIM-listed companies the benefit of being treated as business assets and they can therefore qualify for both business property and taper relief, provided it’s a real trading company.

After the investments have been held for two years, most AIM shares qualify for business property relief, protecting these investments from IHT. In contrast, direct gifts take seven years before they become free of IHT. And the best bit is that investors can retain control of their money.

It should be remembered that the value of shares can fall as well as rise, so if the investment falls by more than 40% before death then the beneficiaries would not be any better off than if they had been required to pay IHT.

AIM shares can also qualify as business assets, so can enjoy accelerated taper relief for Capital Gains Tax (CGT) purposes. So for higher rate taxpayers, this effectively reduces CGT from 28 per cent to 10 per cent after just two years. This compares very favourably with most quoted shares and other non-business assets.

Remember investing in the AIM market is not suitable to all investors. It is regarded as a higher risk investment strategy due to the nature of the equities being invested in.

Please note that all the above schemes involve an element of risk and you could lose some or all of your money. Please take professional advice before investing your money.