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  • FIRST POST
    • the learner
    • By the learner 10th Aug 17, 9:15 PM
    • 160Posts
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    the learner
    EIS and SEIS
    • #1
    • 10th Aug 17, 9:15 PM
    EIS and SEIS 10th Aug 17 at 9:15 PM
    Hi,

    After having abandoned the idea to buy a house, I am currently trying to find the best allocation to my money.
    My total income this year is expected to be a bit above £100,000 so apart from my marginal 40% income tax and 2% NI I will see my tax free allowance reducing by £1 for every £2 extra income I earn.
    Effectively, this will correspond to paying a whooping 62% for any £1 I get from my investments generating income.

    I have filled my ISA allowance and increased my pension contributions so now I need to allocate cash for about £50,000.
    Most of this is already in P2P loans and the rest in some high interest bank account or regular saver. All these will get charged 62% tax.

    I was lookimg for alternatives and found EIS and SEIS. What is the best way to use these?
    I see that investing, for example, £10,000 I can reduce my tax bill by £5,000 (in case of SEIS) which is very nice.
    Given the high risks involved, what are the best ways to diversify this risk and leverage the tax efficient treatment?

    Any suggestion would be really appreciated.
Page 1
    • Dazed and confused
    • By Dazed and confused 11th Aug 17, 9:58 PM
    • 1,979 Posts
    • 888 Thanks
    Dazed and confused
    • #2
    • 11th Aug 17, 9:58 PM
    • #2
    • 11th Aug 17, 9:58 PM
    Isn't increasing pension further going to be better from a tax perspective?

    Looking at gov.uk SEIS relief is a tax credit so will not reduce your income.

    So pension could be 60% effective (total of tax relief and getting all of your Personal Allowance back) whilst SEIS is 50% (which is still good of course, risks associated accepted).
    • the learner
    • By the learner 11th Aug 17, 10:00 PM
    • 160 Posts
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    the learner
    • #3
    • 11th Aug 17, 10:00 PM
    • #3
    • 11th Aug 17, 10:00 PM
    It is just that for pension I need to wait more than 20y... a SEIS could become selleable in 3/5y if things go well.
    • Dazed and confused
    • By Dazed and confused 11th Aug 17, 10:10 PM
    • 1,979 Posts
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    Dazed and confused
    • #4
    • 11th Aug 17, 10:10 PM
    • #4
    • 11th Aug 17, 10:10 PM
    True. As the saying goes don't let the tax tail wagging the dog!!
    • HappyHarry
    • By HappyHarry 11th Aug 17, 10:20 PM
    • 468 Posts
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    HappyHarry
    • #5
    • 11th Aug 17, 10:20 PM
    • #5
    • 11th Aug 17, 10:20 PM
    EIS and SEIS are very high risk investments.

    EIS and SEIS are very attractive to those looking to defer capital gains tax and/or benefit from business property relief on inheritance tax.

    If these benefits are not relevant, then VCTs would normally be preferred, due to their (generally) less excessive risk of capital loss.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • the learner
    • By the learner 11th Aug 17, 10:23 PM
    • 160 Posts
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    the learner
    • #6
    • 11th Aug 17, 10:23 PM
    • #6
    • 11th Aug 17, 10:23 PM
    EIS and SEIS are very high risk investments.

    EIS and SEIS are very attractive to those looking to defer capital gains tax and/or benefit from business property relief on inheritance tax.

    If these benefits are not relevant, then VCTs would normally be preferred, due to their (generally) less excessive risk of capital loss.
    Originally posted by HappyHarry
    Thanks. Can you please give an example of platform I can use to get exposure to VCTs and benefit from tax relief?
    • HappyHarry
    • By HappyHarry 11th Aug 17, 10:32 PM
    • 468 Posts
    • 720 Thanks
    HappyHarry
    • #7
    • 11th Aug 17, 10:32 PM
    • #7
    • 11th Aug 17, 10:32 PM
    Thanks. Can you please give an example of platform I can use to get exposure to VCTs and benefit from tax relief?
    Originally posted by the learner
    Most, if not all VCTs are directly purchased from providers rather than through platforms. They are not products with a significant secondary market, and so there is limited advantage to platforms for providing access.

    I'm sure you understand that nobody on these forums will be able to advise on the pros and cons of any specific VCTs. Each has its own specialties and underlying investments.

    If you're going to invest in this area, I would suggest you either do a lot of reasearch, or employ an IFA.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • the learner
    • By the learner 11th Aug 17, 11:47 PM
    • 160 Posts
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    the learner
    • #8
    • 11th Aug 17, 11:47 PM
    • #8
    • 11th Aug 17, 11:47 PM
    Yes, sure. But just to see if I understand correctly how this all works.
    My estimated income tax bill for this year is about £35,000.
    Now assume I invest today in a VCT that has a minimum investment of £5,000 (just saw some on HL and BestInvest). The tax credit is 30% of the investment so in this case when I compile the tax return for this year I can declare that I invested £5,000 and I should get the 30% of £5,000 off my tax bill?
    So given that this year I pay £35,000 in taxes will I get reimbursed for £1,500?
    Also, I see I have to keep invested for at least 5y. If the 30% tax credit is only for the first year is there any income tax benefit in the following years? Or is it just the benefit of getting tax free dividends?
    • HappyHarry
    • By HappyHarry 12th Aug 17, 6:51 AM
    • 468 Posts
    • 720 Thanks
    HappyHarry
    • #9
    • 12th Aug 17, 6:51 AM
    • #9
    • 12th Aug 17, 6:51 AM
    By investing £5000 in a VCT, You would get a refund of £1500 from HMRC.

    No CGT to pay on sale of the VCT.

    No Income Tax to pay on dividends from the VCT.

    Must be kept for five years else initial tax benefit is lost.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • bowlhead99
    • By bowlhead99 12th Aug 17, 1:14 PM
    • 6,999 Posts
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    bowlhead99
    Yes, sure. But just to see if I understand correctly how this all works.
    My estimated income tax bill for this year is about £35,000.
    Now assume I invest today in a VCT that has a minimum investment of £5,000 (just saw some on HL and BestInvest).
    Originally posted by the learner
    Yes, with you so far, but at this point I should interrupt you to recommend Clubfinance over HL, because they will generally take lower commission for themselves. Even if the waived commission on the initial purchase amount is the same, there will generally be ongoing trail commission each year which HL would keep all for themselves while Clubfinance would pay you a decent slice (e.g. 75% of the 0.25% - 0.5% a year)

    The tax credit is 30% of the investment so in this case when I compile the tax return for this year I can declare that I invested £5,000 and I should get the 30% of £5,000 off my tax bill?
    Yes, e.g. you can make the investment in March and then on 6 April you can fill out your year end tax return for 2017/18 to say that you'd made the £5,000 contribution during the year and you'll probably get paid out the £1,500 within a few weeks.

    VCT is a much quicker process than EIS / SEIS because with those you don't qualify for the tax relief simply by putting up the cash; you are investing in an individual company and have to wait until they formally issue shares to you *and* they commence activities and the HMRC agree with them that the issue of shares qualifies for relief because the company qualifies for that status based on the activities it's just commencing, and allows them to issue a certificate stating that... which they have to send to you and you have to have it in your hand before you can do a tax return to do the claim. That could take best part of a year.

    VCT is much more straightforward because you just state on your tax return that you paid an aggregate amount of £x into VCT(s) and they don't care whether that money has been deployed into underlying portfolio companies yet.
    So given that this year I pay £35,000 in taxes will I get reimbursed for £1,500?
    Yes.

    If you'd done £120k of VCT this year you would be hoping for a 30% reimbursement of £36,000 which is more tax than you actually owed, so you wouldn't get the last £1000. But where the relief is way lower than the total tax bill for the year, there is plenty of headroom to get the relief.

    Also, I see I have to keep invested for at least 5y. If the 30% tax credit is only for the first year is there any income tax benefit in the following years? Or is it just the benefit of getting tax free dividends?
    The tax credit is for giving up your income to make an investment in new issue of venture capital trust shares, and not selling them for at least five years (if you sell them in that timescale you have to give them back the initial 30% relief you took).

    As a side note, in practice most serious investors would want to hold for longer than five years as it might take double that time for the money to be invested into portfolio companies, the portfolio companies be developed, and then exited. If you want to exit at the five year point, you have to find someone to buy your shares. What they're willing to pay you is likely to be a steep discount to NAV - because that someone would have to prefer to invest in your shares over investing in a new VCT issue which would give them 30% instant income tax relief, which is only going to happen if your VCT has a strong portfolio or can be picked up for a decent discount to NAV.

    So rather than selling out at a crazy discount to NAV after five years, most people would hold for longer to actually get some decent investment gains and recover their money through dividends or a wind-up at very close to NAV.

    But anyway...

    You might decide to invest £5000 into VCTs in 2017/18 and get £1500 income tax relief knocked off your tax bill that year. If you decide not to invest any more money in 2018/19, you won't get income tax relief knocked off your tax bill for that year as you haven't made any qualifying investments.

    But as you say, any dividends that the VCT sends you will always be tax free regardless of your annual dividend allowance or tax band, and the buys / sells will be excluded from your CGT calculations.
    • the learner
    • By the learner 12th Aug 17, 2:54 PM
    • 160 Posts
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    the learner
    Thank you, I think the process is quite clear now.
    Only 2 more questions if I can ask.

    1) Tax year for 2017/18 end at the beginning of April 2018. Suppose I make my VCT investment by that date. When am I supposed to fill my tax return to declare all my incomes (apart from salary that is already net of taxes) for the fiscal year 2017/18?

    2) I see that on VCT dividends and capital gains I pay no taxes. But what if my total income from salary is £100,000 so that every extra £2 of income (in whatever form) is lowering my tax free allowance by £1?
    Do the VCT dividends contribute to increasing my total income for the purpose of defining the size of my tax free allowance for the fiscal year?
    If so, effectively I am paying some taxes on those dividends.

    Thank you for sharing your experience.
    • bowlhead99
    • By bowlhead99 12th Aug 17, 3:23 PM
    • 6,999 Posts
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    bowlhead99
    1) Tax year for 2017/18 end at the beginning of April 2018. Suppose I make my VCT investment by that date. When am I supposed to fill my tax return to declare all my incomes (apart from salary that is already net of taxes) for the fiscal year 2017/18?
    Originally posted by the learner
    You have to do it by 31 January 2019. However, as they will owe you money and you would rather get it back sooner rather than later (especially if you are also making extra pension contributions to get the effective 60% tax relief on those, which is a no-brainer if you can afford it, so will be owed something there too), you can do it as early as 6 April 2018.

    I usually do it during April / May if I'm owed a refund but sometimes have to wait until later in the year to get final bits of information (like value of my P11D benefits from work, not usually issued until July after the tax year ends) so I just put conservative estimates in and amend the return at some point later before the following January to get the last few pounds of refund.

    Incidentally you mention "declare all my incomes (apart from salary that is already net of taxes)" but FYI your salary still goes into your tax return along with how much tax was deducted via PAYE, how much bank interest you earned etc ; only by giving them full details of your income and qualifying deductions on a self assessment will you get to the right place. Usually if you earn over £100k they will find out (from your employers monthly returns to them) and send you a letter to tell you to do a return. But you can voluntarily do one as early as you like, as long as the tax year has actually ended so you can see how much income you actually had.

    2) I see that on VCT dividends and capital gains I pay no taxes. But what if my total income from salary is £100,000 so that every extra £2 of income (in whatever form) is lowering my tax free allowance by £1?
    Do the VCT dividends contribute to increasing my total income for the purpose of defining the size of my tax free allowance for the fiscal year?
    No, the dividends are non-taxable and don't go anywhere near your tax return. It's not like they are taxable income and covered by an allowance of some sort. They are simply not taxable income.
    Last edited by bowlhead99; 12-08-2017 at 3:25 PM.
    • the learner
    • By the learner 12th Aug 17, 5:22 PM
    • 160 Posts
    • 8 Thanks
    the learner
    Got you. Thanks for the clear explanations.
    And thanks also for mentioning ClubFinance, since I didn't know about this alternative.
    I was actually considering Cavendish Online, do you think ClubFinance is better than them for VCTs?

    One thing I didn't see there is structured products (available via Cavendish). These are other products I am considering to use my CGT allowance (that is basically unused so far) instead of keeping pay income tax at crazy rates on my income-generating investments.
    • bowlhead99
    • By bowlhead99 12th Aug 17, 9:11 PM
    • 6,999 Posts
    • 12,607 Thanks
    bowlhead99
    For Cavendish vs Clubfinance you would have to do the maths. Cavendish make you pay a £35 application fee for each holding which clubfinance don't, and generally pay you greater percentage of trail commission but levy a £10 charge per VCT per year on that commission so if it's not a lot of extra commission (e.g. 0.25% of £3000 is only £7.50) you might be worse off.

    Personally I don't use Cavendish but maybe if I was already using them for something else I might like to do VCT with them as well to keep down the number of providers I use. But it's not like you need any hands-on assistance from them once you've bought the VCT; after doing the application via Clubfinance I just have an extra share certificate to pin on my wall and start receiving dividends and commissions into my bank account.

    Structured products - I don't currently use. For investments outside ISA/ VCT, the CGT rates are not too bad after you've used the £11k exemption. Your loss of personal income tax allowance creating a high marginal income tax rate band can be avoided by making pension contributions. I don't buy the idea you should get a complicated / expensive structured product purely for a potential tax dodge as it can be better to get improved returns and be able to afford the tax. However, from time to time some structured products show up that are better value than others.
    • the learner
    • By the learner 13th Aug 17, 12:17 AM
    • 160 Posts
    • 8 Thanks
    the learner
    Thanks a lot for the answer.
    I think I will go with the Unicorn AIM VCT for a £2,000 investment to start. I read that liquidity is the main issue here, but I saw that the VCT is listed and it is trading with a bid-offer spread of £2 at the moment. Surely not small but not too bad either. Am I getting it right?

    http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/summary/company-summary/GB00B1RTFN43GBGBXSSQ3.html

    EDIT: I think I got it. Actually what counts is the NAV. For example at the following link I see the NAV is 162.2 but we could sell at 141, so a 14% discount.
    Is this in line with what you would expect to realise as discount in case you want to sell a VCT in general?

    http://www.unicornaimvct.co.uk/investor-area/unicorn-aim-vct
    Last edited by the learner; 13-08-2017 at 12:26 AM.
    • Snakey
    • By Snakey 13th Aug 17, 11:11 AM
    • 1,006 Posts
    • 1,219 Thanks
    Snakey
    So you have taxable income above £100k even after maxing out your pension allowance for the year? And you've used all your brought-forward allowance and everything?

    Unless you are keen to increase your risk and tie up your money, I'd say don't rule out the easy stuff for at least the first year's spare £50k, such as the various high-interest bank accounts and a non-ISA share portfolio. That's because you still qualify for the £5k dividend 0% band (dropping to £2k next year, annoyingly) and the £500 interest income 0% band. Although the amount you get will still count towards your taxable income, to the extent that it falls below the above limits it won't be taxed at 62%, it will be taxed at 20% (i.e. just the PA clawback).

    Assuming, say, a 5% return, you could have £40k in shares before you went above your £2k dividend allowance (and you'd be unlikely to pay CGT on sale of such a small portfolio). Bank interest probably more like 3% so you could have nearly £17k in there.

    And if in future years your earned income rises above £123k, then the tax on the 0% bands will really be 0%.

    p.s. Unrelated to the query, but why do so many people find it impossible to type a percentage without putting "a whopping" or "an eye-watering" in front of it? Are we all tabloid hacks now?
    • the learner
    • By the learner 13th Aug 17, 11:32 AM
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    the learner
    So you have taxable income above £100k even after maxing out your pension allowance for the year? And you've used all your brought-forward allowance and everything?

    Unless you are keen to increase your risk and tie up your money, I'd say don't rule out the easy stuff for at least the first year's spare £50k, such as the various high-interest bank accounts and a non-ISA share portfolio. That's because you still qualify for the £5k dividend 0% band (dropping to £2k next year, annoyingly) and the £500 interest income 0% band. Although the amount you get will still count towards your taxable income, to the extent that it falls below the above limits it won't be taxed at 62%, it will be taxed at 20% (i.e. just the PA clawback).

    Assuming, say, a 5% return, you could have £40k in shares before you went above your £2k dividend allowance (and you'd be unlikely to pay CGT on sale of such a small portfolio). Bank interest probably more like 3% so you could have nearly £17k in there.

    And if in future years your earned income rises above £123k, then the tax on the 0% bands will really be 0%.

    p.s. Unrelated to the query, but why do so many people find it impossible to type a percentage without putting "a whopping" or "an eye-watering" in front of it? Are we all tabloid hacks now?
    Originally posted by Snakey
    Hi thanks for your answer. No I haven't maximised my pension contribution. But I am in my early 30s and I currently contribute (including Company's contribution) about £20,000 per year. I realise I could have much better tax advantages by contributing £20,000 more but I really don't want to put too much in pension at this age since I think my current contribution is already good enough.

    I am already filling up all my ISAs and with bank accounts and P2P I have already used up my £500 allowance thus paying 62% on whatever I earn above that.
    That is why I was keen to find an alternative.
    Because of restrictions to my job, I can only invest in products that are managed by others (i.e. mutual funds and VCT) so it is hard to make full use of the dividend allowance and even the CGT.

    I guess my big mistake has been to put mutual funds in ISAs and have only one IFISA, holding other P2P outside the ISA wrapper.
    I should have transferred an old ISA to an IFISA this year together with the new one I opened. At least all the P2P were tax free now and any income from mutual funds would have been covered by allowances.
    • the learner
    • By the learner 13th Aug 17, 1:53 PM
    • 160 Posts
    • 8 Thanks
    the learner

    I guess my big mistake has been to put mutual funds in ISAs and have only one IFISA, holding other P2P outside the ISA wrapper.
    I should have transferred an old ISA to an IFISA this year together with the new one I opened. At least all the P2P were tax free now and any income from mutual funds would have been covered by allowances.
    Originally posted by the learner
    I think I can still correct this.
    At the moment I have grouped the ISAs from 2014/15, 2015/16 and 2016/17 in a stock amd share ISA with Fidelity.
    The current 2017/18 ISA is in a HNW IFISA.
    Part of my Fidelity S&S is actually still in their cash park cause I switched some of my equity exposure to cash recently.
    Outside the ISAs I have most of my P2P investments via GrowthStreet and Assetz Capital (on their "cash account").

    I could switch part of my money currently in the cash park in Fidelity to another IFISA (or still use HNW) and close some P2P I have with Growth Street.
    I would keep my P2P exposure at similar level but move into a tax free wrapper.
    I will invest the cash that I get from closing Growth Street to invest in those funds I wanted to hold in my Fidelity S&S since I still have dividend and CGT allowance to use.

    Does this partial move from S&S ISA to IFISA make sense?
    • bowlhead99
    • By bowlhead99 13th Aug 17, 2:57 PM
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    bowlhead99
    If your ISA allowance is 'scarce' it does make sense to use it for things that could not be covered by other allowances.

    For example, let's say you have £10,000 that doesn't fit into an ISA allowance, and the long term returns from P2P lending are 7% and the long term returns from equity funds are 9%. I'm just making these numbers up but logically equity ownership carries more risk than debt lending so you would expect higher long term returns unless the debt lending is very high risk. From time to time there are some pretty good opportunities in P2P but they won't last forever as the market matures. But anyway... those 9% equity returns are split (say) 2.5% dividends, 6.5% capital appreciation.

    If you flip your holdings around so that it's the P2P that's covered by an ISA wrapper, your 10k unwrapped investment will no longer generate £700 of interest income that was going to count towards your income being over £100k and result in a loss of personal allowance in addition to the 40% tax on the interest. Instead you would only have £250 of dividend income creating the loss of personal allowance, and the dividend income itself does not get taxed because it's covered by the dividend allowance.

    Therefore the options are:
    A) Have £700 of interest income, taxed at 40% (£280 tax) ; the extra income causes you to lose £350 of personal allowance causing £350 more salary to be taxed at 40% (£140 tax); total tax £420 on the £700.

    Or

    B) Have £250 of dividend income (not taxed because it's within your annual divs allowance) and £650 of capital gains (not taxed because you can cash out in a year when it fits inside your capital gains exemption). The extra income of £250 causes you to lose £125 of personal allowance causing an extra £125 of salary to now be taxed at 40% (£50 extra tax).

    So in that example, with those particular numbers, it is definitely worthwhile to have £10k of P2P in the tax wrapper and lose the tax wrapper from £10k of your equity fund investments. You save £370 of unnecessary tax.

    The negative point is that ultimately the gains from equity funds were better than the P2P gains, so would have increased the size of that £10k ISA wrapper by an extra 2% a year. It is always nicer to have larger total ISA wrappers as it will give you greater flexibility once you are in a position that you're living off investments. Having a £200 larger ISA wrapper next year is clearly not going to make up for the fact that you have paid over £300 of unnecessary tax, but the growth of the ISA wrapper will compound over the next few decades to a point where if you had used high growth equity funds you would have a seriously large ISA pool giving tax savings year after year forever.

    In the short term of course p2p might deliver more than equities, it's a bit of an unknown depending on what happens to markets and why; and you'll no doubt have your own opinion. But the basic logic of moving P2P into ISA at the expense of equity funds which deliver a lower level of dividend income than the P2P delivers interest income, is sound.

    Another negative though is that not all P2P providers offer IF ISAs. While the tax take on unwrapped P2P in your personal circumstances is significant, so you might need to bite the bullet and move, you are then only going to be getting a much more limited range of products (and choice of loans). For a lot of people, they haven't dived into IF ISAs because they perceive they'd get a better product and risk/reward by staying with P2P providers that only have unwrapped opportunities. For you with your high marginal tax rate, the tax saving might tip you over into being satisfied with a provider that offers the ISA even if the loans are not the same quality and you lose more to bad debt or relatively worse yields.

    As others have said, if you'd just throw another £10k or so into your pension (accessible from age 55) you would get rid of the awkward marginal rate problem for this year ; and then you would only be looking at 'normal' 40% tax on your unwrapped P2P income. That's still much higher than the zero tax you'd pay on unwrapped dividend income so ISA-ing the P2P makes sense if the IF ISA providers are any good and you don't mind the fact that the overall ISA wrapper size is not growing as fast as perhaps it could with equity growth funds.
    Last edited by bowlhead99; 13-08-2017 at 2:59 PM.
    • Snakey
    • By Snakey 13th Aug 17, 5:51 PM
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    • 1,219 Thanks
    Snakey
    It's a minor nitpick I know, but watch out for the pensions access age - it surely won't still be 55 by the time somebody in his early thirties gets there.
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