It has become something of a tradition for HM Revenue & Customs to publish figures each year on how many people filed their tax return on Christmas Day. Now there appears to be a rival task vying for festive attention no fewer than 50 customers opened a lifetime individual savings account (Lisa) on 25 December, with almost 1,500 following their lead before New Year's Day, says Skipton Building Society.
The numbers are modest, but will hearten supporters of Lisas, which have been branded a damp squib since their launch last April. So far, just six providers have chosen to offer them. Only Skipton offers a Lisa where the underlying investment is cash (the others are all investment Lisas). Other providers are biding their time as they gauge demand, amid concern that the products are complex to administer and will raise relatively small sums.
Tax-free pot for your house or retirement
However, from a saver's perspective, Lisas provide new options, as well as generous government support, and are certainly worth considering if you're eligible. The basic rules are straightforward: you must be aged between 18 and 39, and the maximum you can invest each year is £4,000. This comes out of your overall Isa allowance, and for every £4 you put in, you'll get a £1 bonus top-up from the government. As with other Isas, the growth and income you earn is tax-free.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Life gets a bit more complicated when it comes to cashing in your savings. One option is to put your Lisa pot towards the purchase of a first home worth up to £450,000, in which case you can access your money as you're due to exchange contracts on the property. If this isn't applicable to you, you can use a Lisa as a savings vehicle for retirement, in which case you must wait until age 60 to get at your money, or pay early access penalties.
Either way, Lisas are attractive not as a replacement for your existing arrangements, but certainly as an additional provision. For self-employed workers in particular, who don't get any pensions contribution from an employer, Lisas will work well as part of your retirement planning, since you're effectively getting tax relief upfront with no tax to pay when you cash in.
Boost your bonus
Move quickly to exploit a one-off concession aimed at savers with help-to-buy Isas who want to move their money into a lifetime Isa.
Help-to-buy Isas were launched in December 2015 to help people save for a first house. They paid bonuses on contributions through a similar mechanism to Lisas, but the scheme will close in November 2019. Although you can keep using existing accounts until December 2030, the rules make it tricky to earn bonuses on both. Since Lisas are more generous and flexible, exercising your right to transfer cash into the new scheme makes sense for most people.
Better still, if you transfer before the end of the current tax year on 5 April, then the money in your help-to-buy Isa doesn't count against your Lisa allowance if you've got £1,000 in the former, say, you can move it across and still put £4,000 in the latter and your 25% bonus is payable on the combined sum. By contrast, from the 2018-2019 tax year onwards, transfers will count against your Lisa allowance; the same £1,000 transfer will reduce your Lisa allowance to £3,000 and your potential bonus will be smaller too. Note that Skipton Building Society says transfers to its cash Lisa must be made by 1 March to benefit.
Tax tip of the week
If you share your firm's profits with your spouse in a way that minimises overall tax, make sure you don't fall foul of HM Revenue & Customs, says Tax Tips & Advice. HMRC rules don't allow one family member to gain a tax advantage by diverting income to another (these rules don't apply if the asset, not just the income it produces, is given by one spouse to the other). This means that if your firm has different classes of shares, with one class held by one spouse and another class by the other, HMRC could object if you pay a different level of dividend on each class of share. To avoid this, make sure that you pay dividends on the highest-dividend share at a rate that if applied to all shares would not exceed the total profit available.
A record year for venture capital
The record fund-raising announced by Octopus Titan venture-capital trust (VCT) last week underlines the growing interest in VCTs, notably from savers worried by tough rules on how much they may contribute to private pensions.
Octopus has raised £200m for the fund by some distance the largest amount ever raised by a single fund in the sector, amid a surge in demand for these collective investment schemes, which build portfolios of high-risk but potentially fast-growing small, early-stage private companies.
The tax benefits
The tax benefits available from VCTs 30% income-tax relief on investments of up to £200,000 a year in new shares, plus tax-free income and growth shouldn't be the only reason you invest, given the potential for losses on small firms. But for those comfortable with this risk, VCTs can be attractive long-term financial planning vehicles.
That may include investors who have already used up their pensions annual allowance, which is a maximum of £40,000 but reduces for higher earners with income of more than £150,000 a year, right down to £10,000 for those who have more than £210,000 coming in.
As the pension limits continue to bite, VCTs are reaping the benefit. In the 2016-2017 tax year, VCTs raised £542m, the second-highest amount ever, but this year the industry looks set to beat that total.
