Investing to Reduce Your Tax Bill

Investing to Reduce Your Tax Bill

As your career progresses, you’ll expect to be earning more. Higher wages usually results in more tax being paid. As the career of a professional sportsman can be short compared to other professions, we understand you’re going to want to make the most of your income.

If you’ve got surplus cash the easiest thing to do would be to leave it in a savings account with a bank or building society. But with interest rates at low levels, the return might not be as much as you’d like and you may have considered alternatives such as buying shares or investing in property.

However, there are other investments available to High Net Worth Individuals who are likely to have significant tax bills, which not only provide a potential return on investment but also have tax advantages.

You could find yourself paying as much as 45% tax on a win or appearance bonus, for example, or even a signing-on fee. To reduce the amount of tax you pay you might want to consider investing any such bonus, or any surplus cash you have, into one of these tax advantaged investments.

The three main types of investment which aim to deliver both an investment return and a tax benefit are the Enterprise Investment Scheme (EIS), Seed EIS and Venture Capital Trusts. 

An EIS investment can be made directly into one company, or into a fund which spreads the investments across a number of businesses with the aim of mitigating investment risk.

The tax benefits of an EIS share investment can be summarised as follows:

  • Reduction in income tax of up to 30% of the investment (to a maximum of £1m). For example, say you receive a £100,000 bonus for winning the league, with no other tax planning in place you’ll likely be paying £45,000 income tax on that leaving you with £55,000 in the bank. An alternative would be to invest £79,000 into EIS shares.
  • Capital Gains Tax (CGT) deferral if gains made three years before and one year after the investment. For example, if you have recently sold a property on which there was a capital gain, by reinvesting the proceeds into an EIS, you’ll defer the tax due until you sell the EIS shares.
  • Tax free growth – there is no CGT on a disposal of qualifying EIS shares on which income tax has been received
  • Share loss relief – if the shares are disposed of at a loss then this can also reduce your income tax bill.
  • Potential Inheritance Tax benefits.

Ideally tax planning should be carried out in advance, but with EIS shares you can treat the investment as being made in the previous tax year so an investment may help to resolve an unexpected tax bill arising for the last tax year.

Our clients often recycle their EIS Investments so once they receive their proceeds, they invest again into EIS funds and obtain another 30% income tax relief. It is theoretically possible to reduce the income tax liability to nil each year by the recycling of investments.

The Seed EIS is similar to EIS but investment is made into even smaller companies and therefore carries a higher risk. However, such investments also have increased tax benefits such as a 50% income tax reduction (rather than 30%) and the potential to eliminate (rather than defer) part of a Capital Gain arising on another asset.

Venture Capital Trusts are also similar in nature to EIS but have a longer investment period of a minimum of 5 years (rather than 3 years under EIS). Dividends from such investments, on the first £200,000 of investment per tax year, are tax-free.

The tax benefits of an EIS investment can be significant. However this summary deals with tax issues only and investment advice must be sought before making any investment decision. The normal, and generally sensible, advice given by financial advisers is to spread investments across a range of different assets to reduce risk but it should be remembered that investments can go down as well as up.

To find out more about investments and reducing your tax liability please get in touch to arrange a free, without obligation meeting.