Contributions to most tax-favoured investments are capped for each tax year. The limit for Individual Savings Accounts (ISAs) is £11,280 in total, rising to £11,520 in April 2013. Up to half of this can be held in a cash ISA, or the whole amount can be invested in stocks and shares.
If you want to invest on behalf of your children aged under 18 you can open a junior ISA for each child who doesn’t have a child trust fund (CTF) account. Anyone can deposit up to £3,600 into the child’s junior ISA in 2012/13 (£3,720 in 2013/14).
There’s no income tax or CGT on profits arising while the money is held in any type of ISA. You can switch from one investment to another within the ISA and keep the tax advantages, so you can build up an investment portfolio of a substantial value over a number of years. However, if you take the money out of your fund in order to spend it, you have to start again with investments of no more than the annual limit each year.
If you are happy with greater risk, and want potentially higher returns, you can invest in small trading companies under the following schemes within these limits in 2012/13:
- Enterprise Investment Scheme (EIS): £1 million
- Venture Capital Trust (VCT): £200,000
- Seed Enterprise Investment Scheme (SEIS): £100,000
Income tax relief is given at 30% of the amount invested under the EIS or VCT, and at 50% for investments under SEIS. 30% relief effectively reduces the cost of investing £10,000 to £7,000; the SEIS reduces the cost of investing £10,000 to £5,000. Also for SEIS investments you can eliminate tax on capital gains made in 2012/13 where the gain is invested under SEIS in the same tax year. These various tax reliefs won’t turn a bad investment into a good one, but it will make a good one better and will reduce the risk involved in investing – if you are a higher rate taxpayer with a capital gain of £100,000 in 2012/13, putting that £100,000 into SEIS will only cost you £22,000 after tax relief of 50% (income tax) and 28% (CGT).
Of course, you need to take proper advice on where to put your money, as well as understanding how it will reduce your tax bill. If you are thinking of investing in one of these schemes, you may want to do so before 5 April to maximise the benefit – the CGT break for SEIS only applies up to 5 April 2013.