DAVID WHISCOMBE of Berg Kaprow Lewis describes a way of ensuring that venture capital trust relief has an income tax effect.
MR BAGGINS MADE a capital gain on United Kingdom property of £250,000 on 1 December 1999. His adviser discussed a range of tax shelters with him and on 1 May 2000 he invested £100,000 in a venture capital trust in order to shelter the gain. In the year to 5 April 2001, his gross income was £20,000 income from property, but this has been covered by Schedule A losses brought forward from earlier years.
DAVID WHISCOMBE of Berg Kaprow Lewis describes a way of ensuring that venture capital trust relief has an income tax effect.
MR BAGGINS MADE a capital gain on United Kingdom property of £250,000 on 1 December 1999. His adviser discussed a range of tax shelters with him and on 1 May 2000 he invested £100,000 in a venture capital trust in order to shelter the gain. In the year to 5 April 2001, his gross income was £20,000 income from property, but this has been covered by Schedule A losses brought forward from earlier years.
A hidden problem
The issue here is fairly straightforward, though not intuitively obvious. Unlike capital gains tax deferral relief under Schedule 5B to the Taxation of Chargeable Gains Act 1992 (investment into shares in an enterprise investment scheme type company), capital gains tax relief under Schedule 5C for investment into a venture capital trust is available only if the investment also gives rise to income tax relief.
This results from paragraph 1(2) of Schedule 5C which reads as follows:
(2) The investor makes a qualifying investment for the purposes of this Schedule if -
(a) he subscribes for any shares by reference to which he is given relief under Part I of Schedule 15B to the Taxes Act 1988 on any amount:
(b) those shares are issued at a qualifying time; and
(c) where that time is before the accrual time, those shares are still held by the investor at the accrual time;
and in this Schedule 'relevant shares', in relation to a case to which this Schedule applies, means any of the shares in a venture capital trust which are acquired by the investor in making the qualifying investment.
This makes it clear that income tax relief must be given and that relief is limited to the lower of:
- an amount equal to tax at the lower rate (20 per cent) on amounts subscribed within the 'permitted maximum', and
- the amount which reduces the individual's liability to nil.
So if the liability is already nil, there is no relief at all.
In Mr Baggins' case, there is no income tax payable for 2000-01 regardless of whether the investment is made, so sadly the use of Schedule A losses that has saved about £3,000 of income tax has cost the client up to £40,000 in capital gains tax.
What could have been done?
Not to make the loss claim is not the answer; relief for the Schedule A loss is mandatory and cannot be disclaimed. Nor is it now possible retrospectively to create income for the tax year 2000-01.
It would, however, have been possible before 5 April 2001 to generate income (even £1 would do), perhaps by putting cash on deposit and ensuring that interest was credited before 5 April. This is because one of the more subtle changes arising from self assessment is that the basic personal allowance (which previously was given automatically) now technically needs to be claimed (see section 256(1), Taxes Act 1988).
Paragraph 64030 of the Revenue's Venture Capital Schemes Manual states that the income tax relief is to be given before any:
- enterprise investment scheme relief;
- income tax reduction in respect of personal reliefs or maintenance payments;
- income tax reduction in respect of mortgage interest payments;
- income tax reduction in respect of private medical insurance payments;
- double taxation relief; or
- basic rate tax to be retained on charges.
However, the manual also states that the personal reliefs mentioned include the married couple's allowance (where due) but not the personal allowance.
So by creating £1 of income and not claiming the personal allowance, venture capital trust relief has an income tax effect and thus capital gains tax deferral relief is due. I am sure Mr Baggins will stare at his tax adviser with incredulity, but it will not be the first time this has happened when it comes to his tax affairs, nor is it likely to be the last.
