Personal Tax Planning

Personal Tax Planning

If you are a taxpayer you should always look to ensure that your assets and earnings are maintained in the most tax efficient manner.

We can provide year round advice on:

• Income Tax
• Capital Gains Tax
• Inheritance Tax and the use of tax efficient wills
• Trusts and Estates

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End of Year Tax Planning

With only 4 weeks left until the end of the current tax year, 5 April 2010, now is an ideal time to review, your financial affairs to ensure that they are as tax efficient as possible. This is particularly important as the new tax year, 2010/11 will see already announced tax increases and possibly a change in Government, which could bring in yet more tax changes.

Below, I have set out some tax planning points for you to consider and I am happy to discuss any of the points further if you wish to. Any action you do take needs, as always, to take into account the wider effects of the planning as well as any tax advantage gained. I can provide you with assistance on reviewing the pros and cons of any action.

Tax increases and restricted allowances

As you are probably aware, the top rate of income tax will rise to 50% from 6 April 2010. This only applies to individuals with taxable income in excess of £150,000 and the new high charge only affects income over that level. Therefore for many the relevant highest tax rate will remain at 40%.
The tax-free personal allowance stays at £6,475 for 2010/11 and so, unusually, is not going to be increased for the new tax year. Furthermore, for those with income over £100,000 the personal allowance will taper away and an individual with an income above £112,950 will receive no personal allowance at all. Due to the interaction of the thresholds and tax rates, the marginal rate of tax will be as high as 60% for those affected. Therefore, it is important to consider how you currently receive income and whether there are any better methods that would work for you. You may also want to consider accelerating income into this tax year before the tax rises occur.

• If you are an owner managed business, have you got accumulated or current year profits to pay a dividend before 5 April.
• If you are in business, are you contemplating buying any large items of plant and machinery. It may be better to do so before the 40% first year capital allowance goes at the end of this tax year.
• Employers should give consideration to share incentive schemes that could give employees a capital receipt in the future.
• Company cars and particularly car fuel benefit can be very expensive in tax terms. It is worth reviewing your policy to see if tax savings can be made.
• Owner managed companies where Director's have income of over £100,000 may wish to consider the use of an Employee Benefit Trust.

Married couples and civil partners

Married couples and civil partners have a few additional planning opportunities. Where possible, you should ensure that you both utilise your personal allowances and tax bands. For example, you may be able to transfer income-producing assets, such as a bank account, to your spouse or civil partner to take advantage of their lower tax rate. With the advent of the 50% tax charge and the restricted personal allowance it is worth reviewing the balance of your joint income to see if any tax savings are possible. Where you have made capital disposals in the current tax year you should also try to ensure that both of your capital gains tax annual exemptions are used effectively, you each have an exemption of £10,100 for 2009/10.

If you intend to make capital disposals in the near future it is worth considering whether to spread these over two tax years to make sure that your capital gains tax annual exemption is fully used up against any gains.

The current rate of capital gains tax is 18% or even 10% if the disposal qualifies for entrepreneur's relief. There has been much press speculation that the rate of capital gains tax may increase to lessen the gap between it and the top rate of income tax. However, there are currently no firm plans being proposed for this to happen. If you are likely to make a significant capital gain in the near future please do let me know so I can look to see what options are available that could help reduce your tax bill.

Gift aid donations should be made by the spouse or civil partner who is the highest rate taxpayer as they are able to obtain higher rate tax relief for the payments. Basic rate taxpayers just receive basic rate relief.

ISAs

Individual savings accounts have been around for many years now and where they form part of your wider investment strategy you should consider if your annual allowance is being fully utilised. The amount most can invest for the current tax year is £7,200. This is set to rise to £10,200 from 6 April 2010. However, for those born before 5 April 1960 the allowance is already £10,200.

Pensions

It is possible to make contributions to a personal pension and contribute up to £3,600 per year (gross), without any evidence of earnings. This could therefore be useful for a non-working spouse, children or for someone with only unearned income.

With effect from 6 April 2010 the age at which benefits can be taken from a pension rises to 55 years. Therefore if you are between 50 and 55 and are considering taking benefit from your pension, including drawing your tax free lump sum if it is not done before 5 April it will have to wait until after your 55th birthday.

There are also important pension contribution changes coming in from April 2011, which will restrict higher rate relief for some, but are also already taking some effect. Now is an ideal time to review your overall pension strategy.

Tax-favoured investments

Investments in venture capital trusts (VCTs) or the enterprise investment scheme (EIS) can be useful tax planning tools where they are appropriate for your investment strategy. Where qualifying investments are made, you can obtain generous tax relief. However, these are high-risk investments and, as with any form of investment, financial planning advice should be sought from a qualified individual before making any decisions.

Inheritance tax

The inheritance tax (IHT) annual exemption is £3,000 and can be carried forward for one year. Therefore, if you have not made any gifts in the past two tax years you will have an exempt amount of £6,000. The annual exemption can only be carried forward one year and if not used in that year is lost and cannot be rolled forward again.

In addition, there are some other useful IHT exemptions to remember, such as the small gifts exemption of £250 to each individual and gifts out of surplus income, which, if they qualify as such, are free from IHT. Where outright gifts are made and the donor survives seven years, the gift would not be subject to IHT in any event.

Trusts

Trusts have not been left alone and with effect from 6 April 2010 there will be a new higher trust tax rate of 50% (previously this was 40 %).

The dividend trust rate will also increase from 32.5% to 42.5%.

The above rates will apply to those trusts that are subject to the special rates for trusts such as discretionary and accumulation and maintenance trusts, where the trust income exceeds the first £1000 known as the "standard rate band." Trust income received within the "standard rate band" is taxed at lower rates depending on the nature of income.

You may therefore wish to consider the investments held within the trust and switch to investments with capital growth as opposed to income producing investments.

Some may also wish to consider the use of a family investment company as an alternative to a trust