Tax-Efficient Investing Flashcards

What is 'Venture Capital Trust' (VCT) and what tax advantages does it offer?

Answer: A listed investment company investing in qualifying small companies, offering 30% income tax relief on new shares (up to £200,000 per year), tax-free dividends, and CGT exemption on disposal of VCT shares

VCTs are listed investment companies investing in portfolios of small qualifying companies. The tax advantages include: 30% income tax relief on new shares (minimum 5-year hold), tax-free dividends, and no CGT on disposal of VCT shares. They are higher risk due to the nature of underlying investments.

What is a 'Self-Invested Personal Pension' (SIPP) and how does it differ from a standard personal pension?

Answer: A SIPP is a personal pension giving the member control over investment decisions, with a wider range of permitted investments (including commercial property) compared to standard insured personal pensions

A SIPP gives the member control over how their pension fund is invested, allowing a wider range of investments including direct equities, funds, bonds, commercial property, and alternatives. Standard insured pensions typically restrict investment to the insurer's approved fund range.

What is the 'tapered annual allowance' and who does it affect?

Answer: A reduction in the pension annual allowance for high earners (adjusted income above £260,000 in 2025/26), reducing the allowance by £1 for every £2 of income above the threshold to a minimum of £10,000

The tapered annual allowance reduces the pension annual allowance for those with adjusted income above £260,000 (2025/26). For every £2 above the threshold, the allowance reduces by £1, to a minimum tapered allowance of £10,000. This limits pension tax relief for the highest earners.

What is the CGT annual exempt amount (AEA) for individuals in 2025/26?

Answer: £3,000

The CGT annual exempt amount for individuals was significantly reduced: it was £12,300 until April 2023, then £6,000 (2023/24), then £3,000 from April 2024 onwards. For 2025/26 it remains at £3,000, meaning only gains above this level are subject to CGT.

What CGT rates apply to gains on residential property (above the AEA) for a higher-rate taxpayer in 2025/26?

Answer: 18% for basic rate, 24% for higher rate (reduced from 28% in 2024 Budget)

Following changes in the October 2024 Budget, CGT on residential property gains is 18% for basic-rate taxpayers and 24% for higher and additional-rate taxpayers (reduced from the previous 28% higher rate). Non-residential assets are subject to 10%/20% rates.

What is an 'onshore bond' and what is its tax treatment?

Answer: A life assurance investment bond issued by a UK-based insurer, subject to corporation tax within the fund; the 5% per annum cumulative tax-deferred withdrawal facility allows deferral of any income tax liability for the investor

An onshore bond is a life assurance wrapper. The fund pays corporation tax internally (treated as satisfying basic-rate liability). The '5% rule' allows investors to withdraw up to 5% of the original investment annually without immediate tax liability, with tax deferred until full surrender or specified events.