Year-end tax planning and tax efficient investments
17 Feb 2023
We outline the tax efficient investments available before the end of the UK tax year.
Every UK resident individual over the age of 18 can invest up to £20,000 in a new ISA in 2022-23. Investments can be in a cash ISA and/or a stocks and shares ISA in any combination of amounts, provided that the overall annual limit is not exceeded. Any part of the annual investment limit unused during the tax year is lost.
Income and gains arising within an ISA are free of income tax and capital gains tax (CGT).
When an individual dies, their surviving spouse or civil partner benefits from an allowance up to the value of the deceased’s ISA savings at the date of their death. This is in addition to the surviving partner’s own normal annual subscription limit.
Junior ISAs are available for all UK resident children under 18 years of age who do not already have a Child Trust Fund. Up to £9,000 can be invested in 2022-23 on behalf of a child (by parents, grandparents or other relatives or friends) in cash, stocks or shares. No withdrawals are permitted until the child reaches 18, when they can roll the junior ISA into an adult ISA or take the cash.
In addition to any existing Junior ISA they may already have, 16 and 17-year-olds can open a cash ISA and invest up to £20,000 in it for 2022-23.
A ‘Lifetime ISA’ is available to those aged between 18 and 40. Individuals can save up to £4,000 each year, and will receive a government bonus of 25%. Restrictions apply: contributions can only be made until they are 50, and withdrawals before they turn 60 are subject to a 25% charge, unless they are made to fund the purchase of a first home.
- Top up your ISA subscriptions before the end of the tax year to the maximum level of £20,000.
- Generally, if you give money to your own children, the interest earned on the funds must not exceed £100 per tax year, otherwise you will pay tax on it. A key advantage of Junior ISAs is that they are excluded from this rule – so consider contributing to a Junior ISA for your children before the end of the tax year.
Venture Capital Schemes
The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs) all offer significant income tax and CGT advantages. Investors’ Relief also offers potential reductions in CGT. You should seek advice to ensure that the relevant conditions are satisfied by both you and the company to secure relief on your investment. HM Revenue & Customs (HMRC) offers an advance clearance procedure to provide comfort that the qualifying conditions relating to the company’s structure, its activities and the mechanics of the share subscription are met.
Individuals can invest up to £2 million annually in EIS companies, provided that any amounts over £1 million are invested in qualifying ‘knowledge intensive’ companies. However, there are restrictions on investments qualifying for EIS relief where there is no real risk to the capital being invested.
It is also important to remember that EIS, SEIS and VCT investments are generally high risk and may be difficult to sell. You should always consider seeking your own independent investment advice before making such an investment.
Enterprise Investment Scheme
The EIS gives tax relief on investments in qualifying trading companies.
The tax reliefs offered by an EIS investment include:
- EIS income tax relief at 30% on amounts invested up to £1 million (up to £2 million for investments in knowledge-intensive companies) in 2022-23, provided the shares are held for at least three years. Investments made during a tax year can also be carried back and treated as made in the previous tax year.
- Capital gains on the disposal of any asset can be deferred by reinvesting the gain in qualifying EIS shares, provided reinvestment is made within the period starting one year before and ending three years after the date of disposal.
- Capital gains on EIS shares are not subject to CGT after three years, provided income tax relief has been claimed.
- Income tax relief for future capital losses is reduced by the EIS income tax relief already received.
Seed Enterprise Investment Scheme
The SEIS gives tax relief on investments into qualifying trading companies less than two years old. It is designed to encourage investment in small start-up companies.
The tax reliefs offered by an SEIS investment include:
- SEIS income tax relief at 50% on amounts invested up to £100,000 in 2022-23, provided the shares are held for at least three years. Investments made during a tax year can also be carried back and treated as made in the previous tax year.
- Capital gains on the disposal of any asset can be made 50% exempt by re-investing the gain in qualifying SEIS shares, provided the reinvestment is in the same tax year.
- Capital gains on SEIS shares are not subject to CGT after three years of ownership.
- Income tax relief for future capital losses is reduced by the SEIS income tax relief already received.
Qualifying EIS and SEIS companies
There are strict qualifying conditions for a company to qualify as an EIS or a SEIS company, for example in relation to the size of the company, the type of trade it undertakes, and the amount of money raised.
Relief may be withdrawn if the qualifying conditions cease to be met.
Venture Capital Trusts
VCTs are quoted investment trusts that invest in a range of relatively small trading companies.
You can obtain income tax relief of 30% by subscribing up to £200,000 for shares in VCTs in 2022-23. Gains are generally exempt from CGT after five years of ownership.
Social Investment Tax Relief
Social Investment Tax Relief (SITR) is intended to encourage investments into social enterprises. You can obtain income tax relief of 30% on up to £1 million of investment, provided you retain your investment for three years. Gains on the investment are also free of CGT.
As with EIS and SEIS relief, there are detailed conditions which apply to both investors and investee enterprises.
Investors’ Relief applies a reduced 10% rate of CGT on up to £10 million of qualifying gains on shares in unlisted trading groups. Amongst other conditions, the shares must be held for at least three years.
- Consider investing in a qualifying EIS or SEIS company before the end of the tax year to secure income tax relief at 30% or 50% respectively during 2022-23.
- Consider a carry-back claim to 2021-22 if EIS or SEIS investments have been made in 2022-23 but the 2021-22 limit has not been fully utilised.
- Consider deferring capital gains realised in the past three years by making a qualifying EIS, SEIS or SITR investment. Bear in mind that CGT rates may rise in future, and so there is a risk that deferred gains may become liable to CGT at a higher rate when they eventually come into charge.
- Gains eligible for BADR that are deferred in this way may still be eligible for BADR when they ultimately come into charge.
- Consider whether an investment will qualify for Investors’ Relief if EIS and SEIS are not available, or where the annual limits have already been reached.
You may also be interested in:
- Year-end tax planning for individuals.
- Year-end tax planning for business owners.
- Year-end tax planning for employers and employees.
- Year-end tax planning for property owners.
- Year-end tax planning for overseas individuals.
- Year-end tax planning and going digital.
This article is published on a general basis for information only and no liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. Tax law is subject to change. This publication represents our understanding of the law and HM Revenue & Customs’ practice as at 1 February 2023. The FCA does not regulate tax advice.