Copyright © 2008 by "Ian McKeever & Co" · All Rights reserved · E-Mail: ianmckeever@actuaries.eu.com
Valuing Your Future
Ian McKeever & Co Consulting Actuaries
Market Views
Markets
Markets
Why should the government have to rescue banks?
The banking Crisis
The banking Crisis
Economic Views
The Economic Outlook
The Economic Outlook
Professional
Services
Services
Issued by Ian McKeever & Co. Authorised and regulated by the Financial Services Authority in the conduct of investment business
What Government Borrowing means for you
What it means
What it means
High Rate Taxpayers 3
Enterprise Investment Scheme
Investors who subscribe to a new issue in a company, which qualifies for the Enterprise Investment Scheme, receive a number of tax benefits. However, in order to qualify, the company has to be unquoted (although AIM quotation does not count) and it must be a trading company as well as fulfilling various more technical requirements.
The tax benefits are as follows
1) Investors get tax relief at 20% on up to £500,000 invested in any one year but shares need to be held for at least 3 years.
2) Capital Gains can be rolled over into an EIS investment and so an existing CGT liability can be deferred. Note that only the gain need to be invested, not the while proceeds of sale of the original investment.
3) Dividends are tax-free
4) If held for 2 years the shares are exempt from Inheritance Tax.
5) Capital Gains are tax-free after 3 years but not deferred gains.
6) Capital losses after allowing for tax relief can be offset against income tax or Capital Gains.
These are investments in single companies. The shares are probably untraded anywhere and so realisation of your investment may be difficult although there is nothing to prevent the company subsequently being quoted, as long as it is not planned at the time of subscription.
These companies are at an early stage in their life and the risks are therefore considerable. Whereas VCTs invest in a portfolio of companies these are single companies and so the risk is much higher. Expenses are also likely to be high. It is wise to diversify into a number of such issues although this multiplies the paperwork.
Woodlands
Gains and income from woodlands are exempt but not gains on the land on which the woods stand. Standing woodland can be held over for Inheritance tax purposes but on disposal IHT will be payable. Commercially run Woodland may be treated as a business asset. Short rotation coppice is treated as agriculture and subject to the same reliefs as in any other agricultural activity.
Capital Shares in Split Capital Investment Trusts
Split capital investment trusts generally have zero coupon preference shares with rights to a fixed sum at wind-up date. Other shares have the rights to dividends and the remainder of the assets on windup. These other rights may be split various ways but for these purposes the capital shares are those which have the rights to the remainder of the assets of the trust. At windup these shares will be last in the queue.
However once all the liabilities in respect of any loans and the other classes of shareholder are met the whole of any gains on the underlying portfolio accrues to the holders of the Capital Shares.
If the other liabilities are met 110% by the assets of the trust and the value of the trust assets grows by a further 10% by the wind up date, the interest of the capital shareholders in the trust assets will have doubled. This is despite the fact that the trust assets themselves have only grown by 10%. Of course if the trust assets fall by 10% the interest of the capital shareholders will fall to nothing.
These shares are of interests because the maximum loss is your initial investment. Someone could for example have £90,000 in Savings Certificates and invest £10,000 in capital shares. If the shares are like these described above and equities rise buy 50% the value of the capital shares at wind-up will be of the order of £60,000 and it will be as if the whole portfolio had been invested in the stock market. If on the other hand equities fall in value by 50% the loss on the holding in Capital Shares will be limited to the initial investment i.e. £10,000 and the investor will still have the Savings Certificates worth in excess of £90,000.
In practice the arithmetic is less simple as the option value is priced into these shares and the level of cover for the other liabilities will vary, but used intelligently, these shares can form part of a low risk investment strategy. It must be remembered that on their own they are extremely high risk. Indeed in most circumstances they are best avoided. They offer the opportunity to gamble on the market and have uses in a risk control strategy. However any potential investors have a clear reason for making the investment as they are a particularly risky kind of investment.
Investors who subscribe to a new issue in a company, which qualifies for the Enterprise Investment Scheme, receive a number of tax benefits. However, in order to qualify, the company has to be unquoted (although AIM quotation does not count) and it must be a trading company as well as fulfilling various more technical requirements.
The tax benefits are as follows
1) Investors get tax relief at 20% on up to £500,000 invested in any one year but shares need to be held for at least 3 years.
2) Capital Gains can be rolled over into an EIS investment and so an existing CGT liability can be deferred. Note that only the gain need to be invested, not the while proceeds of sale of the original investment.
3) Dividends are tax-free
4) If held for 2 years the shares are exempt from Inheritance Tax.
5) Capital Gains are tax-free after 3 years but not deferred gains.
6) Capital losses after allowing for tax relief can be offset against income tax or Capital Gains.
These are investments in single companies. The shares are probably untraded anywhere and so realisation of your investment may be difficult although there is nothing to prevent the company subsequently being quoted, as long as it is not planned at the time of subscription.
These companies are at an early stage in their life and the risks are therefore considerable. Whereas VCTs invest in a portfolio of companies these are single companies and so the risk is much higher. Expenses are also likely to be high. It is wise to diversify into a number of such issues although this multiplies the paperwork.
Woodlands
Gains and income from woodlands are exempt but not gains on the land on which the woods stand. Standing woodland can be held over for Inheritance tax purposes but on disposal IHT will be payable. Commercially run Woodland may be treated as a business asset. Short rotation coppice is treated as agriculture and subject to the same reliefs as in any other agricultural activity.
Capital Shares in Split Capital Investment Trusts
Split capital investment trusts generally have zero coupon preference shares with rights to a fixed sum at wind-up date. Other shares have the rights to dividends and the remainder of the assets on windup. These other rights may be split various ways but for these purposes the capital shares are those which have the rights to the remainder of the assets of the trust. At windup these shares will be last in the queue.
However once all the liabilities in respect of any loans and the other classes of shareholder are met the whole of any gains on the underlying portfolio accrues to the holders of the Capital Shares.
If the other liabilities are met 110% by the assets of the trust and the value of the trust assets grows by a further 10% by the wind up date, the interest of the capital shareholders in the trust assets will have doubled. This is despite the fact that the trust assets themselves have only grown by 10%. Of course if the trust assets fall by 10% the interest of the capital shareholders will fall to nothing.
These shares are of interests because the maximum loss is your initial investment. Someone could for example have £90,000 in Savings Certificates and invest £10,000 in capital shares. If the shares are like these described above and equities rise buy 50% the value of the capital shares at wind-up will be of the order of £60,000 and it will be as if the whole portfolio had been invested in the stock market. If on the other hand equities fall in value by 50% the loss on the holding in Capital Shares will be limited to the initial investment i.e. £10,000 and the investor will still have the Savings Certificates worth in excess of £90,000.
In practice the arithmetic is less simple as the option value is priced into these shares and the level of cover for the other liabilities will vary, but used intelligently, these shares can form part of a low risk investment strategy. It must be remembered that on their own they are extremely high risk. Indeed in most circumstances they are best avoided. They offer the opportunity to gamble on the market and have uses in a risk control strategy. However any potential investors have a clear reason for making the investment as they are a particularly risky kind of investment.
 |
 |
 |