Tax efficient investments
How to save £30,000 or more in taxes.
There are several legal ways to save tax. Some result in direct tax savings combining with deferral of tax payments which also results in an indirect tax savings through inflation.
Looking through an example will make it easier to understand.
Let’s assume today is 1st of March 2014 and you realised a taxable gain of £100,000 on your investment (after annual exemption). You are a higher rate tax payer and your tax liability for the period ending 13/14 is £30,000.
You understand the importance of knowing your tax liability and need to know how much tax you will have to pay by 31st of January 2015 (we will ignore national insurance and payments on account for simplicity).
The tax that needs to be paid by 31st of January 2015 is:
Income Tax - £30,000.
Capital Gains Tax - £28,000 (28% at £100,000).
Total payable by 31 January 2015 - £58,000.
It is quite a considerable amount to pay and I am sure you would appreciate any legal way that could save you a big chunk in payment to HMRC.
Good news is that there is a way to save £30,000 in taxes (in this example) and defer the capital gains tax payment of £28,000. This means that you will not have to pay a penny to HMRC by 31st of January 2015.
Sounds good? Keep on reading.
The question is, what do you need to do in order to have the above tax savings? The answer to that is to invest in an Enterprise Investment Scheme (EIS).
What is an EIS?
Let’s say you decided to invest the £100,000 gain from your investment into a qualifying Enterprise Investment company. This would result in you having a 30% tax relief on your investment of £100,000 i.e. £30,000 (your tax liability as above is £30,000 which will be set off against the relief) and a tax deferral on your gains i.e. no capital gains tax payment of £28,000 by 31st January 2015.
I am sure it is all mind boggling so I thought to use some frequently asked questions:
1. When would you pay the deferred capital gains tax?
Answer: The deferred capital gains tax will need to be paid once you have disposed of your qualifying shares in the EIS Company. Bear in mind that you might dispose the shares a number of years after 2014, which could also give you a potential tax savings in the form of inflation.
2. What happens, if you realise a gain on the disposal of your investment in the EIS Company?
Answer: If you kept your investment in the EIS Company for more than three years then there will be no capital gains tax need to be paid on the disposal of your qualifying shares in the EIS Company.
There are obviously a number of conditions that need to be met before you decide to invest in an EIS company therefore careful consideration is required.
Please note: This doesn’t not constitute as tax advice. Professional advice must be sought before any tax planning. The tax planning may differ based on your individual circumstances.
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