GPs are understandably keen to avoid paying income and capital gains tax (CGT) unnecessarily and one of the most effective ways of reducing your tax liability is to invest in tax-efficient savings schemes.
However, a golden rule of successful investment is never invest solely to save tax. Tax planning should be consistent with GPs’ financial and lifestyle objectives and should not dictate them.
There is often a price tag in terms of investment risk and access to your money where there are tax breaks.
National Savings certificates
If you want to avoid risk altogether, National Savings certificates (NSCs) are considered very secure. NSCs are government backed and their nominal worth, what you invest at today’s worth, cannot go down.
The investment returns from NSCs are exempt from income tax and CGT. Both fixed rate and index-linked (inflation-proofed) NSCs are available.
Maximum contributions are restricted to £15,000 per investor for each NSC issue. Also note that NSCs are not always competitive with higher rate cash deposit accounts.
A different investment type, individual savings accounts (ISAs) have a lot going for them. Although you do not get tax relief on the amount you invest, ISAs provide a lifelong shelter from which tax-free income and capital withdrawals can be made.
The maximum ISA investment is £7,000 for each tax year. You can invest in a range of assets including cash deposits, UK and overseas equity funds (share-based funds), property funds and fixed interest securities.
ISAs help to provide flexibility to build a balanced portfolio geared around your personal risk profile and objectives. If you have not used up this tax year’s ISA allowance, consider investing.
The tax breaks on personal pensions should not be overlooked. Many GPs have the scope to make significant investments into personal pensions alongside their NHS scheme contributions and claim tax relief on all payments.
Tax relief of up to 40 per cent is available on pension contributions up to the higher of £3,600 gross or 100 per cent of relevant earnings each tax year. This is subject to an annual contributions cap of £215,000 for the 2006/7 tax year. Pension funds grow in an environment free of CGT and inheritance tax. At retirement, 25 per cent of the fund can be taken as a tax-free cash sum.
An Enterprise Investment Scheme (EIS) is a direct investment into the new shares of an unquoted trading company that satisfies certain criteria.
EIS dividends are taxable, but in return for keeping the shares for at least three years, investors can claim 20 per cent income tax relief on investments up to £400,000 each tax year and exemption from CGT for any gains made on qualifying shares.
It is possible to defer CGT on gains made from other assets by reinvesting all or part of them into an EIS either a year previous to or three years after making the gain.
EISs are high risk. The only way investors are likely to realise their investment is if the EIS directors achieve an exit by way of a stock market flotation, a trade sale or share buy- back. An EIS is worth considering for GPs who have or are likely to incur large capital gains, for example when selling surgery premises.
Venture Capital Trusts (VCTs) are also high risk. These are essentially small portfolios (between 30 and 50) of smaller companies’ shares that could also qualify for EIS status.
Investments of up to £200,000 each tax year into new VCT shares qualify for 30 per cent income tax relief regardless of the investor’s tax status. Dividends and capital profits can be distributed free of tax and any gains made on disposing of your investment are free from CGT. VCT shares must be held for at least five years to avoid clawback of the tax relief.
As part of a diversified portfolio, a VCT can help to reduce volatility because these shares will not necessarily react in the same way as other investments in similar market conditions. While some VCTs aim to return investors’ gross investment after five years, GPs should view VCTs as long-term (10 years plus) investments.
The Budget may introduce some changes to the current tax breaks in the 2007/8 tax year (which starts on 6 April).
Mr Quinn is a financial planner at London-based Ramsay Brown & Partners, www.ramsaybrown.co.uk
Tips for GP investors
- Index-linked National Savings certificates can be useful when planning for known future capital spending such as funding private education.
- ISAs have a wide range of financial planning uses. For example, they can be used to save for a house deposit, or boost retirement provision.
- With a personal pension remember that you cannot access your investment until you reach the retirement age for your plan.
- With an Enterprise Investment Scheme (EIS) you can defer paying CGT on gains made from other assets by reinvesting the gains in the EIS. Together with income tax relief on the sum invested in the EIS, a total tax saving of up to 60 per cent is achievable.
- Held alongside with other, safer longer-term investments, Venture Capital Trusts (VCTs) can prove useful for GPs who want to boost retirement provision or to set aside money for future commitments. Sums invested also qualify for 30 per cent income tax relief.