Pensions and other tax-efficient investment products

Question 1

Pension contribution types

Answer 1

Workplace / occupational
- tax relief by deducting contributions in employment calculation

Employer contributions
- Tax-free benefit for employees.
- Tax deductible for the employer
- Not limited by counts towards the annual allowance

Personal pension
- Tax relief paid as net 20% tax and by extending bands by gross contribution

Question 2

Methods of capping relief

Answer 2

1. Tax relief for individuals available on higher of [GROSS x 100/80]
   - relevant earnings
   - £3,600
2. Compare
   Total gross contributions by everyone vs annual allowance.

If total contributions exceed AA, then the excess is subject to IT at an individual marginal rate of tax (NSI).

Question 3

Annual Allowance

Answer 3

£40k, abated to £4k if higer earner.

Can be carried fwd 3 tax years part of pension scheme.

Use current year AA and b/f unused AA on FIFO basis.

If adjusted income > £240k, AA is reduced by 1/2

Once over £312k, min AA of £4k is avail

Question 4

Adjusted income

Answer 4

Self-employed = net income

Employed = Net income + employee pension contributions + employer pension contributions.

Reduction only applied where threshold income > £200k

Threshold income = net income - gross personal pension contributions.

Question 5

Receiving benefits from a pension

Answer 5

Flexi-access drawdown: individual draws down 25% tax-free and the rest is reinvested.

The pension fund cannot exceed £1,073,100.

If funds exceed lifetime allowance, there is IT on gains.

Question 6

Rate of tax when lifetime pension allowance exceeded

Answer 6

Excess lump sum charged IT @ 55%

Pension income of excess charged IT @ 25% {lower as an individual will be taxed further on income}

Question 7

EIS (Enterprise investment schemes)

Answer 7

Investment in small, unlisted trading companies.

1) Subscribes for newly issued or irredeemable shares
2) Investor must not be connected with the company either through employment or owning> 30% of shares
3) Investor cannot hold other shares in the company unless EIS/SEIS.
4) Company has to be a small unquoted trading company meeting certain conditions.

Question 8

EIS available tax relief on IT

Answer 8

• Avail as tax reducer on subscriptions up to £1m.
• Relief available lower of:
  1) 30% of the amount subscribed up to a max of £1m
  2) The individuals IT liability for the year
• The investment must be in new issues of ordinary shared
• The claim of EIS relief must be made by the 5th anniversary of the normal self-assessment filing date for the tax year of investment.
• Investor can claim to have all or some of the shares treated as issued in the previous tax year.
• If shares are held 3 or more years, the benefit of IT relief is kept
• If shares are sold at a loss, then the amount withdrawn = proceeds x30% or original % relief if lower

Question 9

EIS on CGT relief

Answer 9

• If held 3 or more years, any gain on the sale of shares is exempt
• if shares are held for less than 3 years, the gain will be taxed normally
• if shares are sold at a capital loss, this capital loss will always be allowable
• However, the cost is reduced by net EIS relief not withdrawn
• Capital loss may be relieved against general income in the same way as trading income.

Question 10

EIS investment relief

Answer 10

A deferral relief is available when an individual disposes of any chargeable asset and reinvests in qualifying EIS shares within 1 year before or 3 years after the disposal of the asset.

Question 11

SEIS (seed enterprise investment scheme)

Answer 11

Similar to EIS but gives more generous tax relief to investors in small start-ups.

1) Subscribes for newly issued shares which are irredeemable and fully paid up.
2) Investor must not be connected with company
3) Connection through employment or owning > 30% of share capital
4) Company is very small start up unquoted company

Question 12

SEIS IT relief

Answer 12

IT relief avail as a tax reducer on subscriptions up to £100k a year

Lower of:
1) 50% of the amount subscribed
2) Individual IT liability for the year.

Question 13

SEIS CGT relief

Answer 13

• Gains on sale exempt if held for more than 3 years
• If held for less than 3 years, the gain is taxed normally
• share sold at a capital loss (allowable)
• Capital loss may be relieved against general income

Question 14

SEIS CGT relief

Answer 14

• Gains on sale exempt if held for more than 3 years
• If held for less than 3 years, the gain is taxed normally
• share sold at a capital loss (allowable)
• Capital loss may be relieved against general income

Question 15

SEIS Investment relief

Answer 15

An exemption relief is available when an individual disposes of any chargeable asset and reinvests in qualifying SEIS shares during the same tax year.

Question 16

VCT (Venture capital trusts)

Answer 16

A listed company which invests in smaller, unquoted trading companies. An investor can spread their risk via VCT investing.

Question 17

VCT IT relief

Answer 17

IT relief is available as a tax reducer up to £200k.

Relief lower of:
- 30% of the amount subscribed up to £200k.
- Individual’s IT liability for the year.

Relief is clawed back in the same way as for EIS relief if VCT shares disposed within 5 years.

Question 18

VCT CGT

Answer 18

Gains on disposal of both secondary purchases or new issues of VCT shares exempt form CGT.

Losses not allowable.

There is no min holding requirement.

Question 19

VCT Dividend income

Answer 19

Tax free income