March 2009

Year end tax planning

FAMILY

Married Couples

Spouses are taxed separately so by careful planning use can be made of personal reliefs and the starting and basic rate tax bands.

As personal allowances cannot be transferred it may be necessary to give gifts of assets.

For example a transfer of savings income of £1,000 from a higher rate taxpayer to one with income below the personal allowance (currently £6,035) will save £400 a year.

Alternatively consider employing your spouse or taking them into partnership as a way of redistributing income.

Aged Over 65

Make use of available age allowances. These are withdrawn once income exceeds £21,800.

Therefore switch to non-taxable or capital growth oriented investments to avoid losing out on an allowance.

Children

Children have their own allowances and tax bands.

Consider switching income producing assets to a child.

This is ineffective if the source of the asset is the parents unless the income arising amounts to less than £100 per annum.

Therefore consider transfer of assets from other relatives e.g. grandparents or employing teenage children in the family business.

Remember children also have their own capital gains tax (CGT) annual exemption £9,600. It may be better for parents to invest for capital growth.

CAPITAL GAINS TAX

The capital gains tax system radically changed in 2008/09. There is now a flat rate of 18% on all chargeable gains subject to capital gains qualifying for Entrepreneurs Relief.

The first £9,600 of any gains is free as they are covered by the annual exemption.

Both husband and wife and children have their own exemption.

Therefore consider transferring assets between spouses to enable them to utilise their annual exemption.

Or selling assets standing at a gain before the end of the tax year on 5 April to use the annual exemption. Bed and breakfasting (sale and re-purchase of shares is no longer tax effective) but two variants still work:

• Sale by one spouse and repurchase by another
• Sale followed by re-purchase via an ISA

Finally, a capital gain can be deferred if the gain is invested in the shares of a qualifying unquoted trading company via the Enterprise Investment Scheme.

INVESTMENTS - ARE THEY TAX EFFICIENT?

Individual Savings Accounts (ISAs)

These provide an income tax and capital gains tax free form of investment. Maximum investment limits are set for tax years. Therefore to take advantage of the limits available for 2008/09 the investment must be made by 5 April 2009.

May invest in one cash ISA and one stocks and shares ISA per tax year within the following limits:

• Cash £3,600 with one provider
• Stocks & Shares £7,200 with one provider
• If you want to invest in both, then the stocks and shares ISA is capped so you don’t exceed the £7,200 limit.

National Savings Certificates are tax free.

Enterprise Investment Scheme (EIS)

Allows income tax relief at 20% on new investments in qualifying unquoted trading companies.

CGT relief is also available if held for at least three years.

Venture Capital Trust (VCT)

If you invest in a VCT any dividends will be exempt from tax as will any capital gains.

Income tax relief at 30% is available on subscriptions to VCT shares,

Finally, review your borrowings. Full tax relief is given on funds borrowed for business purposes. Your mortgage does not qualify for tax relief.

GIVING TO CHARITY

Charitable donations made under the Gift Aid Scheme can result in significant benefits for both the donor and the charity.

The charity is able to claim back 20% basic rate tax plus a 2% supplement on any donations.

If the donor is a higher rate taxpayer the gift will qualify for 40% tax relief.

Therefore a cash gift of £78 will generate a tax refund of £22 for the charity so that it ends up with £100. The donor will get higher rate tax relief of £19.50 so that the net cost of the gift is only £58.50.

Tax relief against 2008/2009 income is possible for donations made between 6 April 2009 and 31 January 2010, providing the payment is made before filing the 2009 tax return as relief can be carried back to the previous tax year.

NATIONAL INSURANCE

If a spouse is employed by the family business it is worth paying earnings between £90 (lower earnings limit) and £105 (upper earnings threshold) per week.

There will be no employer or employee contributions but the employee will obtain entitlement to a state retirement pension and certain other benefits are preserved.

PENSION CONTRIBUTIONS

Tax relief is available on pension contributions at the taxpayer's marginal rate of tax. Therefore a higher rate taxpayer can pay £100 into a pension scheme at a cost of only £60.

All individuals, including children, can obtain tax relief on personal pension contributions of £3,600 gross annually without any reference to earnings.

Higher amounts may be paid based on net relevant earnings (NRE). Individuals can make pension contributions of up to 100% of their NRE in a tax year.