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Year End Tax Planning

The importance of real time information for tax planning can’t be understated. With the end of the tax year fast approaching, now is the ideal time to review the tax efficiency of your financial affairs

  1. Use your ISA allowanceThe current ISA allowance is £10,680 per person of which up to £5,340 can be held in a Cash ISA. From 6th April the allowance will increase to £11,280 (£5.640 for Cash ISAs). Returns from ISAs are not subject to Income Tax or Capital Gains Tax. So why pay tax on savings when you don’t have to?And don’t forget that Junior ISAs are now available to children under the age of 18. The annual investment limit is £3,600 per child and anyone can pay into a Junior ISA (although it is owned by the child).
  2. Maximise pension contributionsPension rules changed on 6 April 2011. The Annual Allowance (the maximum amount that can be paid in one year) reduced to £50.000. However for some people the ability to carry forward unused allowance from previous tax years combined with a change of input period, can allow for a contribution of up to £250,000 with full tax relief.Those who have already made maximum pension contributions might want to consider tax efficient alternatives such as EIS and VCT (see below).
  3. Tax efficient investmentsa.Enterprise Investment Schemes (EIS)Investments into an EIS provide 30% income tax relief. The maximum investment per year is £500,000 – however it is possible to carry back one year.

    After three years EIS shares are exempt from capital gains tax and after two years they may qualify for 100% business property relief for inheritance tax purposes.

    Capital gains tax realised on the disposal of assets can be deferred if the proceeds are reinvested in an EIS within three years. The gain will then crystallise when the EIS shares are sold.

    b.Venture Capital Trusts (VCT)

    The investment is made through a fund which invests in a portfolio of unquoted companies to spread risk. VCT investments provide 30% income tax relief with a maximum investment limit of £200,000 in a tax year.

    No capital gains tax is payable if the VCT shares are held for at least five years and dividends from a VCT are tax free.

    As with the EIS market, some VCT providers have set strategies to minimise the associated investment risks to make VCTs more attractive to a wider group of investors.

    The investor’s original capital is at risk with EIS and VCT investments.

  4. Income tax and national insuranceIf your income is over £150,000 you will now be subject to income tax of 50% (42.5% for dividends). If your income is over £100.000 you will lose some or all of your personal allowance – this creates an effective rate of income tax of 60%.If you are married (or in a registered civil partnership) and your spouse pays less tax than you, consider moving income- yielding savings and investments into their name to make full use of their personal allowance and / or basic rate tax band. The increase in the Personal Allowance from 6th April provides an even greater opportunity for tax-free income.
  5. Capital Gains taxa.SpouseTransfers of assets between spouses are tax free for capital gains tax purposes. For capital gains realised either side of 5th April, using each spouse’s annual exemption (currently £10,600) could result in tax-free capital gains of up to £42,400.

    b.Entrepreneurs’ relief

    In April 2008 Capital Gains Tax (CGT) was substantially changed with the loss of taper/indexation relief and the introduction of a new 18% tax rate (which has subsequently risen to 28% for higher and additional rate tax payers). Entrepreneurs’ relief was also introduced and allows individuals (and some trustees) to access a 10% CGT rate on a proportion of gains made – principally, this is for the disposal of business assets and the calculations can be complex. Careful planning and restructuring of previous plans may allow you to access this beneficial tax rate.

  6. Inheritance tax planningThere are various investments available that enable you to obtain business property relief, which if held for two years will mean that the investment is exempt from Inheritance Tax (IHT).Alternatively there are solutions involving life assurance which will create a fund on death to pay the IHT liability.

    Making regular gifts from capital or income continues to be a popular and effective way of immediately placing assets outside your estate for IHT purposes.

  7. Businessesa.Company CarsNew tax rules are designed to encourage companies to provide employees with fuel efficient cars via favourable capital allowance rates and reduced benefit in kind charges. The converse is true for less fuel efficient cars and employers should seriously consider whether mileage schemes would be beneficial compared to the provision of a company car.

    b.Tax efficient remuneration planning

    When considering extracting profits from a company various issues need to be considered in structuring the overall remuneration package, in particular the increase in income tax rates and national insurance. For companies paying marginal rates of corporation tax there is very little difference in terms of the overall tax cost in taking a dividend rather than a salary or bonus. New VAT rules are applicable from 1/1/12 which may affect remuneration planning already in place.

If you would like to discuss any of the tax planning points in this article please contact FHC at your earliest convenience. The new tax year will commence on 6th April 2012 and implementing sound tax planning now may result in significant cash savings in what remains to be difficult economic times.