Reducing an income tax bill with an ISA
It’s common for clients to want to find ways to reduce their income tax liability. This tax-planning scenario shows how a ISA savings could be used in a Venture Capital Trust ISA to reduce income tax
Build appropriate strategies for your clients
This scenario might be useful for clients who:
- already have an ISA with money held from a previous tax year
- don’t need a guaranteed income
- can tolerate loss
- are comfortable investing for the long term
Things to keep in mind
- Nothing in this scenario should be viewed as advice.
- Any suitability decisions should be based on a client’s objectives and needs, as well as their attitude and capacity for risk.
- You should consider the value, eligibility and timings of tax reliefs and liabilities.
- You should consider the impact of relevant product charges (including initial and ongoing) like administration fees and annual management charges.
Deepika is a committed ISA investor who wants to reduce her income tax bill
Deepika wants to pay for her daughter’s secondary school fees. She earns a salary of £120,000 per year, makes substantial regular contributions to her pension and has accumulated a portfolio of ISAs totalling £500,000 over her lifetime. She has limited excess cash available and wants to find an innovative solution that uses her existing assets.
Deepika has a high annual tax bill. She wants to find government-endorsed ways to reduce the amount of income tax she pays and free up some extra cash. She does not want to tie up her limited available cash.
Deepika would consider investing in UK smaller companies and is comfortable with the associated investment risk.
Deepika’s financial adviser suggests investing in a VCT ISA
Deepika talks to her financial adviser, who makes an assessment based on:
- her risk profile
- her investment time horizon: more than five years
- her attitude towards investing in smaller companies
Based on those factors, Deepika’s adviser suggests investing in a Venture Capital Trust ISA (VCT ISA).
Deepika’s adviser explains that she could transfer part of her existing ISA investments each year. This would help her reduce her annual income tax bill and diversify her portfolio – without tying up any of her regular income. With the Octopus Titan VCT ISA, Deepika can claim up to 30% income tax relief, provided she holds the shares for at least five years.
Risks to remember when investing in a VCT
- VCTs aren’t suitable for everyone. They’re high risk and should be considered as long-term investments. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest.
- Tax treatment depends on individual circumstances and tax rules can change in the future. Tax reliefs also depend on the VCT maintaining its qualifying status. Tax relief is available on investments of up to £200,000 per year.
- VCT shares could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
An overview of VCTs
VCTs were first introduced in 1995 and they’ve grown in popularity since. They’re a good fit for investors who:
- already have personal pensions and Individual Savings Accounts (ISAs)
- are comfortable with higher risk investments
VCTs have a different risk profile to pensions and ISAs and shouldn’t be compared on tax reliefs alone. A VCT isn’t likely to be suitable for investors who:
- need guaranteed income
- can’t tolerate loss
- want to keep immediate access to their money
Tax benefits of investing money in a VCT ISA to reduce income tax
Deepika could claim up to £9,000 income tax relief per year using her existing assets – without tying up any of her regular income.
Here’s an example that shows how Deepika can take advantage of the tax benefits associated with transferring money from her existing ISA investments into the Octopus Titan VCT ISA.
Things to remember about this example
- This example doesn’t take into account any initial fees or ongoing charges.
- Before investing in a VCT, investors should read the product prospectus and Key Information Documents (KID).
Interested in VCTs?
We’re the largest provider of VCTs in the market, offering three types of investments that can provide attractive tax reliefs.
Octopus AIM VCTs
Octopus Apollo VCT
Octopus Titan VCT
We’re a financial services provider with a difference. Our main goal is to help people plan for their financial future, so we’ve built market-leading positions in tax-efficient investment, smaller company financing, renewable energy and healthcare.