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Tax efficient investments
Tax avoidance can be contrasted with tax mitigation which is taking advantage of tax breaks which the Government has legislated to encourage particular types of investment or activity, such as some of the investments discussed below.
Enterprise Investment Scheme (EIS)
Investments in qualifying (EIS) companies attract Income Tax relief at 30% on a maximum annual investment of up to £1m. For Knowledge Intensive Companies the limit is £2m. Qualifying EIS companies are generally trading companies that meet certain maximum limits of size.
It is possible to carry back Income Tax relief to a previous tax year, so a carry back claim made for 2024/25 investments would reduce tax liabilities for 2023/24, accelerating tax relief.
There is also a Capital Gains Tax (CGT) exemption if the shares are held for three years and reduced Inheritance Tax (IHT) due to Business Property Relief (BPR).
There is a CGT Deferral Relief. For every £1 of EIS investment, you are able to defer £1 of other capital gains. The EIS shares must have been subscribed to one year before or three years after the disposal of the gain being deferred. The claim for Deferral Relief must be made within five years of the EIS shares being acquired.
The capital gains deferred will come back into charge (be ‘revived’) after the EIS investment is sold or if the investment fails.
Seed Enterprise Investment Scheme (SEIS)
Invest up to £200,000 in Seed Enterprise Investment Scheme (SEIS) companies and claim Income Tax relief at 50%. The capital gains of SEIS investments are exempt if held for at least three years. SEIS qualifying companies are similar to EIS qualifying companies except they are smaller. So, for every £1 of SEIS investment made, you can extinguish 50p of Income Tax. The same CGT advantages as for EIS are available. There is also CGT relief if the shares are held long enough, CGT Deferral Relief and IHT due to Business Property Relief (BPR).
Claim losses on unquoted shares
Losses on unquoted shares subscribed in qualifying trading companies can relieve Income Tax, instead of Capital Gains Tax.
The loss can be carried back to the previous tax year for set off. However, only losses of up to £50,000 (or 25% of your income if higher) can be relieved in this way. The loss can arise on disposal or on a negligible value claim. The loss on such assets can also be set against taxable gains in the year if Income Tax relief is not required.
Investors in EIS and SEIS shares that become worthless can also claim their loss against their income.
Family investment company (FIC)
FICs enable parents to control the wealth they pass to their children, as well as having tax advantages.
A FIC may be attractive in some circumstances if you are seeking to preserve and pass on family wealth, while at the same time creating tax efficiencies in relation to investments paying dividend income. FICs also offer the opportunity for deductions to be taken for qualifying expenditure such as investment management fees.
Dividends paid out by the company would be taxed on recipients as normal so it may be more efficient to take loan repayments if the family wishes to extract funds.
Differing share classes can enable the gifting of shares to the next generation and can ensure that when a child needs income after the age of 18, for example to fund university education or a property purchase, this can be paid out in the form of a dividend.
Where a parent sets up the structure, dividends paid to children before they reach age 18 are taxed on the parent under the settlement rules, so it may be more efficient for grandparents to set up such a company.
If the children are shareholders, then this can be a useful estate planning tool. Speak to your tax advisor to see if this is suitable for you.