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Wealth Accumulation, Retirement Planning and Family Commitments

27 Feb

I was recently asked how much should I save and how much is enough?

The simple anwer is, whatever you can afford – save and in my book that means invest. The exception is a pot of cash for unexpected eventualities and known commitments.

The whole idea of saving and investing is for money to grow in value at a greater rate than inflation, otherwise in real terms you are losing money. What you think of as your target growth rate and risk profile is a personal matter.

You must be realistic and be aware that the higher the possible returns, the more risk and volatility you will be requested to accept. Also, more risk does not automatically mean higher returns. What it means is more risk the higher range of returns, so you could lose or gain more but there are no guarantees. My role as your financial adviser is to guide, inform and advise you on this as it will have a serious effect on the potential outcome. So, planning, reviews and planning agian is paramount.

So where to start?

OK, this may well be different depending your stage of life.

Pre-retirement is all about accumulating wealth for self (you and possibly spouse) and family.  You need to accumulate for when one day you stop working, so in most cases this is Pension Planning, ISAs, EISs, VCTs, Collectives amd possibly Investment Bonds; and of course the clearing all debts. This is so, when children go to University, need a deposit for their first flat, get married, first car, start a buiness or whatever else then, as with all us parents, we help. And one day, when it’s time to retire, we have sufficient wealth to support and fund the rest of our lives to the standard we had planned.

There are two key important factors, firstly you only get what you put in; and secondly, you need to make sure whoever looks after your investments help them to grow. We are talking effective wealth management. If you only hear from people annually or worse, never then it is fair to say they aren’t managing but they maybe being paid for the “service” they are not providing.

Post-retirement is all about wealth preservation with the target of sustaineable and growing income over time but most importantly protecting the underlying value of the investments.

The key factor being, you need to make sure whoever looks after your investments takes a suitable approach/strategy to help sustain and hopefully grow the investments. You will recognise this comment from above – we are talking effective wealth management. If you only hear from people annually or worse, never then it is fair to say they aren’t managing but they maybe being paid for the “service” they are not providing.

Here are some simple concepts :-

If you invest £500 per month and just make 5% per annum, compounded annually :-

  • 20 years – you would have invested £120,000 and be valued at £203,728.89
  • 25 years – you would have invested £150,000 and be valued at £294,060.44
  • 30 years – you would have invested £180,000 and be valued at £409,348.92

If you invest £3,000 per month and just make 6% per annum, compounded annually :-

  • 10 years – you would have invested £360,000 and be valued at £489,792.87
  • 20 years – you would have invested £720,000 and be valued at £1,366,937.30
  • 30 years – you would have invested £1,080,000 and be valued at £2,937,769.39

If you invest £100,000 and just make 5% per annum, compounded annually :-

  • 5 years – valued at £127,628.20
  • 10 years – valued at £162,889.50
  • 20 years – valued at £265,329.80

If you invest £500,000 and just make 6% per annum, compounded annually :-

  • 3 years – valued at £595,508.00
  • 5 years – valued at £669,112.80
  • 10 years – valued at £895,423.80

All you need now is your investment adviser to make in excess of 5% or 6%, to make these figures come true. Also, if we look at the last decade, the figures could be far superior to these.

Should you have any questions or want my help, my email address is :-



Tax Planning Before The End of the Tax Year – 5th April 2012

16 Feb

5 April 2012 Tax Planning

With the end of the UK tax year approaching, review your business and personal finances to ensure they are as tax-efficient as possible.

Consider reducing taxable income, creating Reliefs to off-set tax bills, and/or deferring distributions to take advantage of year end dates, for example: 

  • by making pension contributions
  • claiming tax relief through investing in Enterprise Investment Schemes (EIS) & Venture Capital Trusts (VCT)
  • converting investments in non-tax assessable investments for the future – ISAs
  • donating to charity
  • transferring income producing assets to a spouse or civil partner
  • delaying bonus or dividend payments


1. Pension Contributions and Retirement Planning

Make pension contributions allows you to enjoy tax breaks on your pension savings. There are tax reliefs as you invest and a tax-free regime for your savings. Your employer may also be able to contribute and obtain tax relief.

The Basics :-

  • For the 2011/12 tax year individuals can contribute up to £50,000 into their pension.
  • Those who have not contributed the full £50,000 in any of the previous three years may be able to pay increased amounts prior to 5 April 2012.
  • Individuals with no earnings can contribute up to £2,880 into pension funds, and the government will gross this annual up to £ 3,600. This can be effective for children and spouses.
  • The lifetime allowance is being reduced to £1.5 million from £1.8 million from 6 April 2012. Individuals should review if any actions need to be taken before 5 April 2012
  • For pension contributions to be applied against 2011/12 income they must be paid by 5 April 2012.
  • Tax relief is available on annual contributions limited to the greater of £3,600 (gross) or the amount of the UK relevant earnings, but subject also to the annual allowance. Pension contributions can be made at up to 100% of relevant earnings, subject to the annual allowance of £50,000.
  • Unused allowances (up to £50,000 per year) may be carried forward for up to three years. Unused allowances from 2008/09 will be lost unless used by 5 April 2012.
  • From October 2012, employers will have to enrol all eligible workers into a qualifying pension scheme. Auto-enrolment is being phased in, on a staged basis. In the 2011 Autumn Statement, the starting deadline for employers with fewer than 50 workers was deferred until the start of the next Parliament.

2.  Investments with Tax Shelters

This typically involves Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT). Both are Government-sponsored arrangements designed to reward investors who risk capital in qualifying companies. Investment can be direct, managed portfolios and restricted mandate portfolios. These investments are higher risk by nature, so this risk can be diversified by investing across a range of qualifying schemes (managed portfolio) and/or with a defined mandate (possibly further diversifying risk by defining the strategy)

2.1  The Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

This document provides a very broad overview for potential investors. It does not cover all the detailed rules, so investors should not proceed solely on the basis of this information, and should seek professional advice.

The information relates only to shares issued on or after 6 April 2009.

It does not cover the legislation relating to shares issued before that date. Also readers must bear in mind that the Reliefs and legislation relating to them may change in the future.

The current Tax Reliefs available for qualifying investors are:

  • 30% Income Tax Relief – on equity investments up to £500,000 per tax year (£1 million from 6 April 2012) in eligible companies. The relief can also be carried back one year. To retain the Tax Relief, the shares must be held for at least three years
  • Capital Gains Tax Exemption – if it is held for at least three years from the date of purchase (same qualification as for the Income Tax Relief), any gain is free from Capital Gains Tax.
  • Capital Gains Tax Deferral Relief – it is available to individuals and trustees of certain trusts. The payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS qualifying company. (The gain can be from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose.)
  • Loss Relief – if the shares are disposed of at a loss, you can elect the amount of the loss, less any Income Tax relief given, can be set against income of the year in which they were disposed (or any income of the previous year), instead of being set off against any capital gains.
  • Inheritance Tax Relief – by investing in companies that also qualify for Business Property Relief, investments can be exempt from Inheritance Tax after two years (from the point at which the investment into the underlying company is made). In order to qualify, the investments must be held at the time of death.


2.2  Venture Capital Trusts (VCTs) 

Venture Capital Trusts (VCTs) were introduced by the government in 1995 to encourage individuals to invest in small UK companies. They are supported by a number of tax incentives which reflect the fact that investment in smaller and unquoted companies is likely to involve a higher degree of risk.

The current Tax Reliefs available for qualifying investors are :-

  • 30% Income Tax Relief – on amount subscribed for shares issued in the tax year and up to £200,000 per tax year. The shares must be new ordinary shares and must not carry any preferential rights or rights of redemption at any time in the period of five years beginning with their date of issue. You can get this Relief for the tax year in which these ‘eligible shares’ were issued, provided that you subscribed for the shares on your own behalf, the shares were issued to you, and you hold them for at least five years.
  • Tax Free Dividends – exempt from Income Tax on dividends from ordinary shares in VCTs
  • Capital Gains Tax Relief – you may not have to pay Capital Gains Tax on any gain you make when you dispose of your VCT shares.

3.  Tax Efficient Savings and Investments

ISAs: You have until 5 April 2012 to make your 2011/12 ISA investment of up to a maximum of £10,680 (up to £5,340 can be invested in cash). 16-18 year olds can invest up to £5,340 only in a cash ISA.

The new Junior ISA, for those aged under 18 who do not have a Child Trust Fund account, allows investment of up to £3,600 in 2011/12.

4.  Don’t waste Personal Allowances 

4.1  The ‘income tax-free’ personal allowance for 2011/12 is £7,475. Take steps now to ensure you fully use it.

If your spouse or partner has little or no income, transfer income to them to ensure that personal allowances are being utilised. Similarly, it is costly for one spouse or civil partner to be paying tax at 40% or even 50% while the other pays tax at only 20%. Equalising income where possible ensures that you both pay tax at the lowest possible rate, thereby reducing the overall combined tax bill.

The personal allowance is gradually withdrawn where adjusted net income exceeds £100,000 (being reduced by £1 for every £2 of income over £100,000) and is lost completely once income reaches £114,950.

4.2  Capital Gains Tax

All individuals have an annual gains exemption up to £10,600. Married couples should therefore consider transferring assets between spouses prior to sale in order to potentially take advantage of two exemptions i.e. £10,600 each.

4.3  Inheritance Tax

Utilise your Inheritance Tax (IHT) Exemptions. Inheritance Tax is currently payable at 40% on total assets exceeding £325,000 at death. This threshold is per person and has been frozen until 2015. Early planning is therefore essential in order to minimise your liability to Inheritance Tax.

Transfers to a spouse or civil partner remain exempt (Inter-Spousal Exemption). A reduced Inheritance Tax rate of 36% will apply from 6 April 2012 to death estates, where 10% or more of the net estate is left to charity.

£3,000 annual exemption for gifts remains available to all individuals and can be carried forward one year if not utilised. There is also an unlimited small gifts exemption of £250 per beneficiary each year, gifts to registered charities, gifts out of net income, amongst others.

The exemption for regular gifts out of income is one which should be usefully reviewed at the end of each tax year. Payments into life policies for the benefit of others can be a useful way of utilising this exemption. Where pure cash gifts are involved, evidence should be kept of the intention of the donor to maintain a regular pattern of gifts and also to confirm that the amounts given are within the individual’s excess income for the relevant year.

Your Inheritance Tax Planning strategies may also include maximising Reliefs, utilising both exempt, potentially exempt and lifetime chargeable transfers, and making the most of trusts.

5.  Business Allowances

5.1  Capital Expenditure – The majority of businesses are able to claim 100% Annual Investment Allowance (AIA) on the first £100,000 of expenditure on most types of plant and machinery (except cars) 

Changes to Capital Allowances :-

From April 2012 the amount of expenditure on plant and machinery qualifying for a 100% year one write-off (via the AIA), reduces from £100,000 to just £25,000.

For businesses with years straddling 31 March/5 April, there will be a transitional AIA and writing down allowance.


5.2  Enterprise Zones

Announced in the Autumn Statement, the Enterprise Zones in assisted areas will qualify for enhanced capital allowances. These allowances will be available from 1 April 2012 to 31 March 2018.


5.3  The Family Unit

Family businesses should consider paying all members who are involved in the business an income so they can use their personal allowances but optimises income for State Pension purposes.

Where there is a partnership or the spouse is a shareholder in the family company, there is more scope to spread the tax burden between the couple.

At an income level where one spouse is already receiving income in excess of £150,000, there will be a tax saving by transferring outright (or perhaps into joint names) investments to the other spouse whose income is below that level.

More interesting are shares in family trading companies. Provided an individual holds at least 5% of the shares in such a company and is an employee, a married couple can potentially double up on Entrepreneur’s Relief for Capital Gains Tax purposes.

Children also have their own personal allowances and, where there are family discretionary trusts, consideration should be given to distributions to utilise personal allowances and lower bands of tax.