Over the past few weeks we have looked at many ‘housekeeping’ actions that you should be considering prior to the end of the 2024/25 tax year which, at the time of writing, is just 43 days away.
Today sees our fourth and final set of tips and ideas, focusing on ISAs and tax-efficient investments.
- ISA’s
Everyone over the age of 18 (16 for children with a Junior ISA – see below) can invest up to £20,000 in a new ISA in 2024/25– either a cash ISA, a stocks and shares ISA or a combination. This £20,000 limit can’t be carried forward to the following tax year so, if you invest say £16,000 by 5/4/25, you can’t carry the £4,000 forward into 2025/26. Income and growth are tax-free. So, consider topping up your ISA contribution for 2024/25 to £20,000.
- Junior ISA’s
You can invest, on behalf of the under-18’s, up to £9,000 in a mix of cash and stocks/shares. Although they can’t draw anything out until they’re 18, they can then either take the cash or roll it into a normal ISA. From the age of 16 children with a junior ISA can also open a normal cash ISA and invest up to £20,000 before the end of the tax year. Consider opening and/or contributing to a Junior ISA for your children.
- Help to buy ISA
Although it’s no longer possible to open a new Help to buy ISA, if you already have one you can pay in up to £200 per month. When used to fund a deposit on a first home, the ISA will receive a bonus of 25% on whatever is in there (the minimum bonus is £400 and the bonus is capped at £3,000). To qualify for this bonus the ISA funds must be used towards the purchase of a first home with a value of up to £250,000 (£450,000 if in London). If you have a help to buy ISA, you can continue to use it – but to get the 25% bonus you’ll have to buy that first home by November 2030!
- Lifetime ISA
This one is available to those aged 18-40 only so I’m afraid I’ll have to pass on this! You can save up to £4,000 per year and, a bit like the help to buy ISA, get a bonus of 25%. Once open, you can continue to use it beyond 40 but can only make contributions up to the age of 50. Be careful with this one though, as a lot of the benefit will be lost if you need to get your hands on the money in the ISA before you’re 60. If you withdraw funds prior to age 60, there’s a 25% charge – unless the reason for the withdrawal is to fund a first home (unlikely at that age). However, if you’ve already got a Help to buy ISA (see above), the 25% charge will apply even if you withdraw funds for buying your first home.
- Enterprise Investment Scheme
If you’re feeling a bit flush and still face a large income tax liability, consider investing in shares which qualify for the Enterprise Investment Scheme (EIS). You can invest up to £1m in 2024/25 and receive a reduction of 30% of the amount invested off your tax bill. If you invest in knowledge-intensive companies, you can invest up to £2m and still get the 30% tax-reduction, potentially cutting your income tax bill by £600k! You’ll have to hold the shares for at least three years or this benefit will be clawed back. If you faced (and paid) a big tax bill last year (2023/24) you could invest by 5/4/25 and carry back the relief to the previous year, obtaining a refund of tax paid for 2023/24.
If you’re facing a gain on the sale of an asset, you can defer the capital gains tax liability by re-investing the proceeds from the sale of the asset in shares which qualify under the EIS. The purchase of the qualifying shares must be made within three years of the date on which the asset giving rise to the gain was sold – but purchases of EIS shares made up to one year before the sale of the asset can also be deemed to be ‘reinvestment’ for this purpose.
Once you’ve held the EIS shares for a minimum of three years, you can sell them and the gain is exempt from capital gains tax.
- Seed Enterprise Investment Scheme (SEIS)
This is similar to the EIS but designed for investments in smaller, start-up companies. These are likely to be riskier investments so, to reward you, a 50% deduction from your tax liability is available rather than the 30% on offer for normal EIS investments. Qualifying companies must be less than three years old and you’ll get the 50% tax deduction on an investment of up to £200,000. Gains on disposal are exempt from capital gains tax as long as you’ve held the shares for at least three years and you can, as with EIS, carry back the investment and treat it as if made in the previous tax year, thereby reducing the prior year’s tax liability and getting a refund of tax already paid. If you sell another asset which would have been subject to capital gain tax then 50% of that gain will be exempt from CGT so long as you re-invest the proceeds of the disposal in SEIS shares in the same tax year.
- Venture Capital Trusts (VCT’s)
Investing in a VCT is arguably less risky than making EIS or, even more so, SEIS investments. This is because when buying EIS/SEIS shares you’re actually purchasing shares in a single company. A VCT is a quoted investment trust which itself invests in a range of smaller companies. So, the risk is arguably diluted as the VCT holds a balanced portfolio of investments. What you’re actually buying here is a slice of the ‘diversified’ VCT.
You can invest up to £200,000 in the shares of a VCT in 2024/25 and, by doing so, you’ll shave 30% of the amount invested off your tax liability. To avoid paying capital gains tax on disposal of your VCT shares you’ll need to hang on to them for five years. Dividends received from the VCT during your ownership are tax-free.
