Sheltering Your Liabilities

The term tax shelter may convey ideas of intricate schemes devised to avoid paying ones dues to society. In reality, however, the meaning is rather more down to earth and just means those areas where Government has seen fit to grant certain tax advantages.

Most of us use ISAs for some of our money with investments of up to £10,680 annually possible in Income Tax and Capital Gains Tax free equity based funds (or half that in cash ISAs). My investment colleagues advise me that the depressed stock markets make it more likely to be a good time to go into equity markets but do take advice.

More commonly, the term is used for specific investments which actually give tax relief when bought. The obvious one here is pensions. A payment into a personal pension fund for instance will attract tax relief at your highest rate of Income Tax – it is then invested in a largely tax-free fund. When you crystallise your pension following retirement you can take up to 25% of the fund as a tax-free lump sum and any pension bought with the remainder would be subject to Income Tax when paid out. Many people pay a lower rate of tax in retirement than beforehand making the whole exercise a very tax-efficient savings scheme.

In recent years the Government has been keen to encourage investment in smaller growing businesses and has introduced two specific tax reliefs for the purpose. These are the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). Both types of investment carry up from Income Tax relief of 30% which is a considerable incentive. Of course, the nature of the investment can be volatile but some are much less problematic and, provided you take proper advice, they may be suitable for a much wider range of people than use them at the moment. Dividends payable by VCTs are also free of Income Tax and both types of investment have Capital Gains Tax advantages.

Cumbria missed out on having an Enterprise Zone but, despite the disappointment, opportunities will start to be offered to make investments in funds set up for such areas elsewhere in the country. Normally, these investments will attract full tax relief at your highest rate of tax but they will be medium term investments at least.

Finally, there are insurance bonds. These should not be confused with bonds offered by banks or building societies which are just fixed term accounts. An insurance bond is a form of life insurance policy but, although the policy terminates on a death, the value can also be realised by surrendering the policy. Crucially, it is also possible to make partial surrenders. Provided you do not surrender more than 5% of the initial investment each year, there is no Income Tax to pay on the amounts received. Any liability is delayed until the policy ends. These bonds are tremendously attractive to higher rate taxpayers who can, at worst, delay paying the tax and may be able to arrange to cash in the bond at a time when they are liable only at the basic rate.

Bob Wheatcroft
Partner and Head of Tax


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