EIS and SEIS

bowlhead99

the_learner wrote: »

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?

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.

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

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

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

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

Snakey wrote: »

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?

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

the_learner wrote: »

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.

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

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

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.

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.

bowlhead99

Yes, agreed, maybe closer to 60 if state pension age is ticking up to about 70 by then. So probably not really any earlier than LISA access.

If I were early 30s and cash rich I would at least consider LISA as well as pension (despite pension having the much higher initial tax relief) - more flexibility on drawing it out for emergency access (even if that access is to stuff it into a pension), and especially valuable for someone who has given up on buying a property for now but might at some point change their mind.