17 Mar 2022

Tax favoured investments

With the cost-of-living crisis tumbling into view and inflation rates at their highest for 30 years (and still expected to rise), it’s no wonder people are looking to find ways to save money where they can.

Businesses and individuals are prepared to be far savvier with their savings in 2022 and beyond while the economy stabilises. Indeed, 62 per cent of households are experiencing higher energy bills, with 59 per cent concerned about how these hikes will affect their ability to buy food for themselves and their families.

Businesses are equally concerned, with nearly three-quarters saying they are having to turn to price increases in response the rise in costs. More than three in five specifically cite the rise in energy costs, and over six in 10 mention increased wage bills.

As many experience the squeeze over the coming months, saving money in the most effective way possible will be a core focus for all – individuals and businesses alike. Here are a few tax favoured investments to consider in 2022.

Individual savings accounts (ISAs)
The ISA family has grown considerably since its inauguration in 1999, with a further five ISAs to consider:

  1. Help to buy ISA: first-time buyers get a 25% cash bonus from the Government on savings made into a help to buy ISA. The help to buy ISA closed to new accounts on 1 December 2019. If you have already opened a help to buy ISA, you will be able to continue saving into your account until November 2029.
  2. Inheritance ISA which allows a spouse or civil partner to inherit the savings in an ISA belonging to their deceased loved one without triggering income tax.
  3. Lifetime ISA (LISA) where UK residents aged between 18-39 can contribute up to £4,000 per tax year and the Government will then add a 25% bonus at the end of each tax year in respect of the contributions paid.
  4. Flexible ISA is a basic ISA which allows you to withdraw and replace money from your ISA.
  5. Innovative finance ISA (IFISA) lets you put your savings with peer-to-peer lenders or invest in companies through crowd funding websites.

The maximum allowance that can be paid into an ISA is £20,000 per year. You must save, or invest, by 5th April for it to count for that year and if you don’t use the allowance it is lost.

Enterprise Investment Schemes and Seed EIS Shares
Tax relief is available where you subscribe for shares qualifying for Enterprise Investment Schemes (EIS) or Seed EIS (SEIS) relief.

Under the EIS scheme, your tax liability for the year may be reduced by up to 30% of the sum invested. However, there is a specific time window in which the investor must subscribe for their EIS shares. The reinvestment must be made within 12 months before or 36 months after the disposal of the original asset.

You can invest up to £1m under EIS in the year, or up to £2m if you invest in knowledge intensive companies (broadly, these are early-stage businesses engaged in scientific or technological innovation).

The Seed EIS scheme offers another form of reinvestment relief for investors who subscribe for shares in small start-up companies.

Income tax relief is given at the rate of 50% of the sum invested, and relief may be given against tax in the two years prior. Both EIS and SEIS shares are normally exempt from Capital Gains Tax (CGT) and Inheritance Tax (IHT), subject to detailed conditions being met.

A note of caution however: several professionally managed EIS and SEIS investment funds exist which invest in a broad range of EIS and SEIS companies on behalf of investors. Whilst such funds should allow for risk management through the spreading of your investment between different companies, it must be remembered that EIS and SEIS investments will, more likely than not, be viewed as carrying with them a high degree of risk.

Venture Capital Trusts
Venture Capital Trusts (VCTs) are specialist tax incentivised investments that enable individuals to invest indirectly in a range of small higher risk trading companies and securities. VCTs are companies and, like investment trusts, their shares trade on the London Stock Exchange.

Shares in qualifying VCTs offer the following tax incentives:

  1. Up front income tax relief at 30% of the amount subscribed, subject to a maximum investment of £200,000 per tax year. The investment must be held for a minimum of five years to retain the income tax relief. Note that income tax relief on the purchase of VCTs is available only where new shares are subscribed, and not for shares acquired from another shareholder.
  2. Dividends received on VCT shares are exempt from income tax in respect of shares acquired withing the ‘permitted maximum’ (including shares acquired from another holder).
  3. CGT exemption applies on the VCT shares (including shares acquired from another holder).

Knowing where to start when it comes to saving your hard-earned money can be daunting, especially if you’re considering options that are new to you. If you’d like support in this decision-making process, contact one of the friendly team at Monahans who will be more than happy to help.

Richard Brooks