04: Savings, investment and tax

1. Invest in assets that produce gains subject to CGT at 18% rather than income subject to income tax at between 10% and 50% (from 2010/11). You can make gains of £10,100 in 2009/10 before you have to pay any CGT. Review your investments to see what proportion could be held in assets that come under the CGT regime – eg shares, unit trusts, and investment trusts. But bear in mind the extra risk that might be involved in CGT-based investments. The value of share-based investments can go down as well as up and past performance is not a reliable indicator of future performance.

2. Take advantage of the increased Individual Savings Account (ISA) investment limits and generate tax-free income and capital gains. The maximum annual amount which can be invested in an ISA will increase on 6 April 2010 from £7,200 to £10,200. But if you were born before 6 April 1960, you can invest up to £10,200 in an ISA from 6 October 2009. Half of the maximum limit can be in a cash ISA with the remainder being invested in a shares ISA. As there are many ISAs on the market, it is worth shopping around to find the best deal, taking account of the rates of return and fees charged.

3. Obtain income tax relief by subscribing for shares in a Venture Capital Trust (VCT) or in an Enterprise Investment Scheme (EIS). In 2009/10, a subscription in VCT shares costing up to £200,000 can create a 30% income tax credit against your income tax liability. The shares are also exempt from CGT when they are sold. A subscription in EIS shares costing up to £500,000 can create a 20% tax credit against your income tax liability. You can also defer tax on your capital gains by reinvesting the profits in EIS shares. But be warned – both VCTs and EISs can be risky investments and you must hold VCT shares for at least five years and EIS shares for three years in order to retain your income tax credit.Last Updated