UK: Beyond Pension Contributions – Alternative Investments

Last Updated: 12 January 2012
Article by Smith & Williamson

Many people are now unable to make further pension contributions, or their contributions are more restricted, due to recent pension changes. So alternative investments, which will also provide tax relief and/or tax efficiency, are now of more interest than ever.

The investments covered here are not appropriate for everyone because of their higher-risk profile (often involving a significant risk of loss of the original capital sum invested), minimum holding periods and potential lack of liquidity. But while these risks should be taken into account, tax-efficient investments can still have a place as part of an overall strategic financial plan.

Venture capital trusts

  • Maximum investment: £200,000 p.a.
  • Income tax relief: 30%
  • Tax-free dividends
  • No CGT on sale
  • Minimum holding period: 5 years

Venture capital trusts (VCTs) are designed to provide capital to small and expanding companies, with the aim of growing the business and generating a profit for the VCT. By virtue of its investment in smaller companies, VCTs are considered as higher risk and are generally regarded as longterm investments.

Individuals can invest up to £200,000 per tax year and benefit from 30% income tax relief, which is claimed via their selfassessment tax return. Dividends are tax free and there is no CGT should the VCT be sold. There is, however, a minimum holding period of five years.

Given that many small businesses are finding it difficult to raise capital through the traditional bank route, VCTs are ideally placed to strike attractive deals with these businesses and will normally take a seat on their board to provide expertise in decision making and to guide the business forward.

Enterprise investment schemes

  • Maximum investment: £500,000 p.a.
  • Income tax relief: 30%
  • No CGT on sale
  • IHT exemption: after 2 years
  • Minimum holding period: 3 years

Similar to VCTs, enterprise investment schemes (EISs) also invest in small businesses. However, while the VCT is likely to have several investments, an EIS will only invest in one company, which increases the element of risk for the investor and could result in failure to recover the amount invested.

Following a change in legislation in 2011, EISs now provide the same level of income tax relief on investment as a VCT, at 30% (increased from 20%) for investments up to £500,000. There is a minimum holding period of three years, and EISs also allow CGT deferral.

Any capital gain realised on sale is not taxable, provided income tax relief has been received and not withdrawn. Losses may also be allowable for income tax purposes. After two years, the EIS investment is exempt from IHT.

It is now possible to carry back all of the income tax relief to the previous tax year.

Changes to VCT/EIS restrictions from 6 April 2012

As things stand, a VCT or EIS can only invest £1m into an individual company, which must not have more than 50 employees. But with effect from 2012/13, the investment limit increases to £10m, with the employee threshold raised to 250, and the investee company must have no more than £15m of gross assets. The annual investment limit for an EIS also increases from £500,000 to £1m, while the annual limit for VCTs remains at £200,000.

Business premises renovation allowance

  • Income tax allowance: up to 100%
  • Writing-down allowance: up to 25%
  • Minimum holding period: 7 years
  • Qualifying capital expenditure by: 11 April 2017

The business premises renovation allowance (BPRA) was introduced in the Finance Act 2005. It came into force on 11 April 2007 and initially ran for a period of five years; this period was extended by a further five years in the Finance Bill 2011, meaning that all capital expenditure must be incurred by 11 April 2017.

BPRA is available in certain areas of the country for capital expenditure when converting, renovating or repairing and bringing back into use certain commercial buildings or structures that are no longer being used. The premises must previously have been used for the purposes of trade, and must have been unused for at least 12 months.

The expenditure must be incurred to make the property into qualifying business premises. 'Premises' means any building or structure, which must be used, or available and suitable for use, for the purpose of a trade, profession or vocation, or an office or offices, and will typically be structured around hotel developments. It should be borne in mind that any investment in commercial property can be vulnerable to a general downturn in price and value and there is no assurance that the scheme's investment objectives will be met.

BPRA benefits from an initial income tax allowance of up to 100% of the sum invested, with a straight-line-writing-down allowance of up to 25% of the qualifying expenditure on any remaining balance. The premises must be retained for a period of seven years after completion.

'Qualifying expenditure' is capital expenditure incurred on or after 11 April 2007 and before 11 April 2017 involving the conversion, renovation and repair of such premises.

Schemes will be structured so that, in addition to the initial investment, a nonrecourse loan will also be taken out to help gear the prospective returns. Borrowing can increase the risks of an investment.

Seek advice

These types of investment may not be suitable or appropriate for everyone and, while aiming to achieve the mitigation of tax, they carry the risk that an investor may not get back the amount invested. Specialist advice is therefore necessary when considering these tax-efficient investment opportunities, their suitability for individual circumstances, and the associated risks and benefits.

Enterprise zone trusts

  • Capital allowance: up to 100%
  • Minimum holding period: 7 years
  • Rent can be offset against loan interest
  • CGT payable on sale

The Government introduced enterprise zones (EZs) in the 1980s as a way of encouraging businesses developed in designated areas, with London's Docklands being one of the most successful examples. In August 2011, new EZs were announced, including areas in Essex, Kent, Cornwall, Oxfordshire and Cambridgeshire.

EZ trusts invest in commercial property within these designated zones and will typically involve a cash deposit of between 35% and 40% of the gross investment by the investor, together with a limited recourse loan, which is secured against the property.

As with BPRA schemes, the minimum holding period is seven years from the date when the building is first used; and capital allowance of up to 100% qualifying expenditure is available, although normally this ranges from 75% to 95%. EZ trusts, like BPRA, face the same risks associated with investment in commercial property.

During the holding period, any rent received is taxable, but this can be offset against the loan interest. In the event of a sale, any gain is subject to CGT.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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