Finance Sources for Individuals in terms of Tax Treatment Borrowings and Different Investment Schemes on Setting up a Business UK


The investments of a person are dependent on the availability of funds. A person who makes an investment privately, would acquire the amount of funds from a profit after setting up a business UK or from personal wage. He can also make the decision of borrowing the amount of funds from a lender. Such treatment of borrowings, along with the investment products, securities and individual savings account in this regard are a part of discussion in this blog.

Borrowings Tax Treatment

When the payment of interest is made in some restricted circumstances, only then a relief for tax is available.

Apart from a property letting business or the borrowings made after a business registration UK, in which the paid interest is the subtraction from profits, then the relief for interest is only available if the charge of interest is made on a loan that qualifies, for example, a loan to invest in partnerships or close companies when companies house set up a new company. In this case relief for interest on borrowings of credit card or overdrafts is prohibited by them.

It should be noted here that on a loan, the relief for interest is not available in order to purchase shares after the companies house set up a new company in case if a claim for EIS relief is already made for the investment.

It is preferable to make the repayment of loans in case of availability of extra funds unless relief for tax is available for the interest. However, while making the evaluation of the scenario, as well as making a comparison of the charge of interest on the borrowing with that of income produced by the extra funds, then there is a requirement to take any capital return into account that may be produced if the investment of extra funds is done.

Investment Schemes for Individuals

There is a great variety of investment schemes available to the individuals, whose range is from a bank deposit that is almost risk free to an investment at a very high risk upon a company that is a small unquoted company of trading under the scheme of seed enterprise investment.

It may be a preferred choice to make an investment for capital growth, instead of income, as the taxation of capital gains is done at 28% for an individual who is a payer of tax at an additional or a higher rate as compared to the additional and higher rates of income tax of 40% and 45% (or in the case of dividends, 32.5% and 37.5%)

Investments based on Deposits

Most of the investments based on deposits are considered to be investments at a fairly low risk in which an investor acquires an interest’s low rate as a result of the deposition of his capital with the institution.

The products available and their treatments of tax are as under:

  • The banks and buildings providing the notice accounts, instant access accounts, money market accounts and the fixed term deposits have the treatment of tax such that the tax is to be paid on interest in the form of savings income, normally paid total of 20% tax, but not on money market deposits over £50000 or if the investor provides a certification that he is not a taxpayer
  • The banks and building societies and the National Savings and Investments being the provider, having the cash ISAs as the type of account are deemed to be free of tax charge.
  • The National Savings and Investments having the investment accounts or the direct saver accounts are treated for tax in a way that interest is taxable as savings income and paid gross
  • The savings certificate, fixed interest or the index linked provided by the National Savings and Investments (NS & I) is tax free.

Securities of Fixed Interest

A security of fixed interest makes the payment of a fixed rate of interest and has a known value of maturity as long as it is held until its date of redemption.

A security of fixed interest is a loan to a government, a company, a local authority or a building society. The security makes the payment of a fixed rate of interest and has a value of maturity known so long as the stock is held until its date of redemption.

The corporate bonds and the government securities can be traded in the market as they are negotiable. The available securities and their treatment of tax (Income tax and Capital Gains Tax) are as under:

  • The investment in the form of local authority bonds and the government securities are liable to income tax in a way that the taxation of income is done in the form of savings income, paid gross and accrued income scheme is applicable. The capital gains tax in this case includes the exempt gains and the losses not allowable.
  • Investment in the form of company loan stock that is a qualifying corporate bond is subject to treatment of tax in the form that for income tax, the taxation of interest is done as a savings income. Total paid tax of 20% unless the list of loan stock is provided on an exchange of recognized stock, when paid gross. Accrued income scheme is applicable in this case.
  • Investment in the form of loan stock of a company that is not a qualifying corporate bond is subject to income tax in a way that the taxation of interest is done as savings income. Total paid tax at 20% unless loan stock is listed on a recognized exchange of stock when paid gross. The accrued income scheme is applicable in this case. As far as the capital gains tax is considered, it includes the securities of allowable losses and the taxable gains.

Individual Savings Accounts (ISAs)

The Individual Savings Accounts (ISAs) provide a wrapper for investments in cash, shares and stocks that are free of tax. They are tax efficient and are made up of components which include cash, stocks and shares.

It is important that the investor is a resident of the UK in the year in which he makes the investment. As a normal practice, the investor should be 18 years or above. However, only the individuals of ages 16 or 17 can hold the cash-only ISA.

There are certain limits to the annual subscription, such as the cash component of £5,760 and the shares and stock component’s balance of up to £11,520.

The element of the shares and the stock can contain products of medium term stakeholder that include unit trust, unit linked insurance and OEIC. The component of shares and stock may also hold all of the non-stakeholder life insurance. Investments that produce a return like cash (capital at minimum risk or at no risk), then these investments are restricted to the component of cash.

Investments made within the ISA are not included in both the capital gains tax and the income tax. However, if cash is held in a shares and stock ISA, then an amount of 20% is deducted from the received interest. This cannot be recovered. There is no subtraction from interest in an ISA of cash.

Equities as the High Risk Investments

The equities are supposedly the investments made at a high risk as neither the capital nor the income is secure.

When an investor makes the purchase of a share in a UK plc company formation, such as the Marks and Spencer, that is exactly what he has done; that he buys a share under the UK plc company formation ownership.

The acquiring of dividends is done with a non-refundable credit of tax at 10%. The gross amount of the received dividends has to be liable to income tax. A capital gain that is calculated by making use of the matching rules and it arises on shares, is subject to CGT. The losses are allowable losses in this scenario.

The equities in companies listed on a well-known stock exchange are less risky in unlisted companies, in general.

Enterprise Investment Scheme (EIS)

The enterprise investment scheme (EIS), is a scheme formed for the promotion of investment and enterprise by helping unlisted and high risk companies for the raising of finance by the issue of ordinary shares to individual investors who are not connected to that company.

The individuals who have done the subscription of EIS shares have the entitlement of relief of income tax. The rules are that a tax reducer of the lower of 30% of the subscribed amount for investments that qualify, can be claimed for by the individuals. The maximum qualifying investment equals an amount of £1,000,000 and the tax liability of the individual for the year after subtracting relief of VCT.

The investor can make a claim to have a part of the shares and all of the shares as issued in the preceding year of tax. This is subject to the net deemed and actual investment that is not more than the limit for the previous year.

The withdrawal of relief can be done if some specific events occur within the duration of three years, for example, sale of the shares.

Reliefs for capital gains tax are available when relief for income tax is available. These reliefs include the EIS shares whose disposal is done after the period of three years, any gain is excluded from the CGT. If the disposal of shares is done within the 3 years, then the computation of any gain is done in a normal manner. If the disposal of EIS shares is done at any time at a loss, the loss is then allowable but the price of acquisition of the shares is lessened by the relief for EIS attributable to the shares. The loss is considered eligible for the relief of share loss against the general income.

The deferral, reinvestment or relief of EIS may be available to defer chargeable gains in the case if an individual makes an investment in the shares of EIS in the period that starts one year before and terminates three years after the asset’s disposal.

Seed Enterprise Investment Scheme (SEIS)

The scheme of seed enterprise investment is much like the enterprise investment scheme (EIS), but the rewards of the investment are given in a small, startup unquoted companies of trade with a bigger tax reducer.

The individuals can also make an investment in the shares of SEIS and acquire the relief for income tax and the reliefs for capital gains tax.

The companies that qualify are startup companies, smaller in size with a bigger tax reducer of 50% whose availability is up to £100,000 of investments, that presents a bigger risk of making an investment in these companies.

Venture Capital Trusts (VCTS)

The VCTs are the listed companies that make an investment in the unquoted companies of trade and fulfill specific conditions, hence letting the investors to distribute their risk over a count of unquoted companies with higher risk by acquiring reliefs for the income tax and the capital gains tax.

The VCT scheme is different in the EIS in the form that the individual investor may distribute his risk over a number of unquoted companies with a higher risk.

The following benefits of tax are acquired by an individual who makes an investment in the VCT:

  • The received dividends are an income free of tax.
  • A tax reduction equal to 30% of the invested amount and a withdrawal of relief if the disposal of shares is made within the five years or if the VCT stops qualifying.
  • Capital gains on selling out the shares in the VCT are not included in the CGT and the losses cannot be held allowable,

It should be kept in mind that no minimum holding period exists for the benefits of dividends free from tax and exemption from CGT.

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