A range of investment tax changes has taken place over the past couple of years. Some have been the result of much consultation and have received little attention. The June Budget did not add any more changes, However, it did confirm some proposals which were made in the March Budget but were not legislated for because of the Election.

Individual Savings Accounts (ISAs)

For 2010/11 the ISA investment limit is £10,200, of which up to £5,100 may be placed in the cash component. The 2009/10 age 50 threshold for this level of investment has fallen away.

Mr Osborne confirmed that he would be following his predecessor's proposal that from 2011/12 onwards the ISA investment limits will be increased in line with the RPI. The resultant annual limit will be rounded to the nearer £120, to make the corresponding monthly limits divisible by £10. Mr Osborne's one new piece of information was that the annual RPI used would that be that of the previous September (the same as currently used for tax allowances and bands).

As the original ISA investment ceiling was £7,000 in April 1999, the 2010/11 limit is already higher than it would have been if RPI linking had existed from day one (which would have made it about £9,440). ISAs have become a more important investment tool, given the restrictions on pension provision and 50% income tax.

Offshore funds

The rules for offshore funds were changed in December 2009, following a long period of consultation. The changes mean that offshore funds which accumulate income rather than pay dividends are no longer automatically subject to income tax on gains. The flip side is that to qualify for the gains being subject to CGT, the accumulated income must be taxed annually.

This reform, alongside changes to offshore fund dividend tax treatment introduced in the 2009 Budget, has increased the appeal of offshore funds.

Venture Capital Trusts and Enterprise Investment Schemes

The March Budget confirmed that the rules for Venture Capital Trusts (VCTs) would be amended as a result of changes needed to comply with EU State Aid rules. However, legislation to put through the revisions did not make the 'wash-up' Finance Act. Mr Osborne said that he would bring in the changes later this year, although no specific date was given. Thus there is a limited window of time during which advantage can be taken of the existing rules.

The measures will ultimately:

• Change the minimum amount VCTs must hold in eligible shares. At present 'eligible shares' in unlisted companies must represent at least 30% of a VCT's qualifying investments (which in turn have to be at least 70% of the VCT). The eligible shares minimum holding will more than double to 70%. However, the new limit will not apply to money raised before the change takes effect.
• Revise the definition of VCT 'eligible shares' to include shares which may carry certain preferential dividend rights.
• Allow a VCT to be listed on any EU/EEA market rather than be restricted to a UK listing.
• Prevent shares in companies that are 'in difficulty' from qualifying for the purposes of the VCT and Enterprise Investment Scheme (EIS) rules.
• For EISs and VCTs, change the existing requirement that a company must have a qualifying trade carried out wholly or mainly in the UK to one that it need only have a permanent establishment in the UK.

PLANNING POINTS

ISAs

Since 6 April 2008 it has been possible to transfer the cash component of an ISA, including anything from a former TESSA, into the stocks and shares component. When this option was first announced, it was widely viewed as a rather pointless facility, as for most investors the value of the income tax saving from the cash component was greater than any tax savings offered by the stocks and shares component.

The world has changed since this switch facility first became available. We have now had a base rate of just 0.5% for over 15 months, with little sign that there will be any significant increase soon. Many existing cash ISAs are paying well under 1%, with some paying just 0.1%. Consumer Focus, a statutory consumer body, has made a super-complaint to the Office of Fair Trading about cash ISAs. It says that '15 million cash ISA holders could be losing out in interest worth up to £3 billion a year because of the way the market operates'.

If you are looking for income from your ISA, a switch from cash to the stocks and shares component now has much more appeal. For example, an investment in a sterling corporate bond fund could produce an income of 5% or more, while a UK equity income fund could offer more than 4%. Both yields are tax free via an ISA. The quid pro quo for the immediate extra income is that you lose the capital security of the cash ISA and your new higher income could fall as well as rise. Before making the switch - which is irreversible - you should always take independent advice.

Venture Capital Trusts

The change to VCTs will potentially alter the nature of the VCT market. In the last few months of the previous tax year, limited life VCTs proved very popular. These VCTs, which aim to wind up a little after the end of the five year tax relief claw back period, are at the lower end of the VCT risk spectrum - which means they are still high risk, but not quite such high risk. One way they limit risk is to maximise their investment in secured loans rather than equity. Some VCT providers have said that when the proportion of loans that can be included falls, limited life VCTs will become more difficult to construct and less readily available.

The fact that the change to minimum equity holdings has been delayed means that there is an opportunity to invest in limited life VCTs now and still benefit from the current rules. However, it does mean that if you wait until the tax year end rush in March 2011, you could be too late.

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This news item is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as at July 2008. No action must be taken or refrained from based on its contents alone. Accordingly no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.

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