Higher rate taxpayers looking for alternatives to investing cash in a pension can add venture capital trusts to their portfolios which pay tax-free dividends.
Providing the investor can afford to lock money away for five years, venture capital trusts (VCT) are a sure fire way to extend the £5,000 tax free dividend allowance from April 2016.
VCTs also offer other tax breaks.
Any capital going in to the deal picks up a 30% income tax reduction of the amount invested, so a £50,000 stake in a VCT company lops £15,000 from a tax bill.
Other options are the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS).
Both offer tax breaks – but at different rates.
SEIS and EIS tax breaks
Investors in SEIS will gain a 50% income tax deduction on the sum invested. The maximum investment is £100,000, so the maximum tax relief in a year is £50,000.
No tax is charged against capital growth, providing shares in the start-up are held for three years and loss relief is applied if the SEIS company fails.
EIS investors receive similar reliefs, but the income tax deduction is 30% on investments up to a maximum £1 million.
Shares also have to be held for three years to attract capital gains tax relief and loss relief is also available.
Tax is paid on dividends issued by EIS companies, while SEIS start-ups are unlikely to pay a dividend – but if they do, the money is taxed.
Difficult choices
Most companies qualifying for SEIS and EIS will also come under the business property relief regime for inheritance tax.
As the government changes the tax rules for savings, investments and pensions, the lines between each are becoming blurred and instead of having a clear path to tax-efficient investment, the new measures are becoming options that depend on specific personal financial circumstances.
Some of these pension alternatives also depend on the rate of tax an investor pays – for instance, basic and higher rate taxpayers receive the personal savings allowance at different rates, but an additional rate taxpayer gets nothing.
But basic rate taxpayers are disadvantaged by the new dividend allowance, while higher and additional rate taxpayers benefit up to certain levels of income.
