3 New Year Resolutions

Published in Investing on 26 March 2010

Protect your wealth as a new tax year starts.

How was it for you? For many of us, the Budget wasn't as bad as had been feared -- and even contained the occasional snippet of good news.

No increase in Capital Gains Tax, increased ISA limits, a consultation regarding the inclusion of AIM shares in ISAs: I am, I admit, pleasantly surprised.

But with just weeks to go before a general election, a certain amount of generosity was to be expected. Whichever party wins the election, I've little doubt that the next few budgets will be tougher, and contain far less for investors to cheer about.

And if that party happens to be the Conservatives, their first budget has been promised within 50 days of taking office.

Early planning pays

Hence the wisdom of taking a long hard look at three New Year resolutions -- with the new year in question being the new tax year beginning 6 April 2010.

Because it's entirely possible that tax-efficient investment opportunities available at the start of the tax year might not be available at the end of the tax year.

Nor is tax-efficiency the only consideration. Investment fund manager Fidelity, for instance, said this week that it received over one third of its ISA applications in the last week of the last tax year.

And investors doing that this year would be buying in at a time when the FTSE 100 was touching 5,700, rather than the lows of 5,100 available as recently as early February. Early planning, then, can play to your advantage.

So here are three resolutions to consider adopting sooner, rather than later -- and certainly well before 5 April 2011.

Eye-up that ISA

A friend of mine is systematically selling his stocks and funds, and buying them back inside an ISA wrapper, maximising each year's allowance as it becomes available. It's sensible, but it's a shame that he didn't do it years ago.

Freedom from Capital Gains Tax, no impact on the older person's age-related allowance, and no higher-rate income tax on dividends -- which is a hit of 32.5% at present, rising to 42.5% in April. I'm certainly glad my dividends are in an ISA shelter.

So max out your ISA allowance this year, of course, but if you've still got eligible bonds, funds and shares outside an ISA as of 6 April, then shelter them in an ISA wrapper, too. The ISA limit rises to £10,200 for everyone as of 6 April -- which is £20,400 for a couple.

Stuff your SIPP

As I've written before, I have transferred all my pension investments over to a SIPP wrapper. It's given me flexibility, control -- and higher-rate tax relief on contributions of 40%.

But for how much longer? After imposing tough limits on pension payments by higher earners, scrapping higher-rate tax relief on contributions from 6 April would have been a soft target for the Chancellor. Today, for instance, earners of up to £129,999 a year can still claim 40% relief.

Scrapping higher-rate relief was certainly one of the measures touted in the media, and observers such as Peter Hargreaves of Hargreaves Lansdown (LSE: HL) have confessed themselves surprised -- if relieved -- that it wasn't announced on Wednesday.

So if you're are higher-rate tax payer, don't assume that the higher-rate relief on pension contributions will remain. In short, make those pension contributions sooner rather than later.

And don't forget, too, the non-tax advantages of using a SIPP as a pension wrapper: flexibility and control.

Back in mid-2007, for instance, a pension saver with £100,000 in a SIPP could have sold out, and rode out the downturn in cash. Buying back into the market at its low point in March 2009, they would now be over 60% up -- and would likely have slept more easily into the bargain.

Venture into VCTs

I haven't, I must confess, hitherto looked very closely at Venture Capital Trusts (VCTs). By nature I tend to prefer buying into solid, well-established businesses -- which start-ups, by definitions, aren't.

VCTs aim to offer useful diversification, by spreading investors' money across a range of fledgling companies. And, as Harvey Jones wrote, because of generous tax breaks, they're increasingly appearing on investors' radar screens -- especially those of higher-rate taxpayers facing the new 50% tax rate.

As he points out, investing the maximum allowable £200,000 in VCTs could knock £60,000 off your tax bill, thanks to a generous 30% income tax relief.

Better still, a new-ish variant, the limited life VCT, tends not to invest equity in start-ups, but offers them loans instead, secured on assets -- thus providing an income stream from day one, as well as avoiding the perennial redemption problems faced by VCTs.

I won't be venturing into VCTs -- my earnings aren't high enough -- but if you earn more than £150,000 a year, it could be worth taking a look.

But do bear in mind the greater risks, and also the perennially doubtful wisdom of letting the tax-break tail wag the investment dog. Finally, you need to hold for five years to qualify for the tax relief.

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UncleEbenezer 27 Mar 2010 , 12:12am

Erm, why should low earnings be a barrier to entering into VCTs?

A £25k investment eats up your entire 20% tax liability. That puts you in a position to pay the entire 40% component into pension and charitable contributions, and give HMRC the finger!

The only thing that'll stop me doing that is if I take advantage of the stamp duty holiday to buy a house (so my funds get diverted). That becomes a real possibility if the new government stops pouring taxpayers money into propping up the house price bubble.

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