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Individuals - Pre 6 April 2010 Tax Planning Ideas

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2 November 2009

Save tax with our pre 6 April 2010 tax planning ideas 

Whilst the country is officially out of recession, many individuals and businesses are still feeling the effects of the 18 month downturn. With the 31 January filing deadline passed, now is the ideal time to review your tax position to ensure you are paying no more tax than you need to.  

These ideas are not exhaustive and are not covered in detail. To discuss your specific circumstances please contact your usual Hazlewoods contact or e-mail tax@hazlewoods.co.uk.

Please see below for information on....

  • Income Tax 
  • Capital Gains Tax
  • Inheritance Tax

Income Tax

Personal allowances

Unused personal allowances cannot be transferred to another person or carried forward, so try and ensure allowances are covered by income. This is especially important for married couples and civil partners. In 2009/10 the basic personal allowance is £6,475.

Some planning opportunities to consider are:

  • Where a spouse has insufficient income to use their full personal allowance then income-producing assets can be transferred to them. The transferee spouse must be free to use the relating income as they choose and to dispose of the asset if they wish. Such transfers can also be considered where one spouse has unused lower rate tax bands and the other is a higher rate taxpayer.

  • Whether it is possible to accelerate or delay income to either before or after 5 April 2010 to ensure your full personal allowance and lower rate tax bands are used in each year.

  • If you are over 65, check if you can arrange your income to be below the threshold for the higher personal allowances. The thresholds start at £22,900 if you are over 65, and the extra allowances are gradually phased out. 

  • If you do not wish to make an outright gift of income-producing assets you could transfer them into joint names. You can make a formal declaration stating the proportions in which the individual assets are held. Alternatively if no such declaration is made the income is split equally between both spouses. (Note that dividends paid on shares in close companies are taxed according to actual ownership).

Children’s personal allowances

Children also have tax allowances to use against their income. Although there is anti-avoidance legislation to prevent parents transferring investments to their children. However, if the annual income received by a child from capital provided by a parent is less than £100, there will be no tax suffered by the parent.
Child Trust Fund
Parents, family and friends of children born on or after 1 September 2002 can contribute up to £1,200 between them per year into a Child Trust Fund (CTF). This is in addition to the Government’s contributions and neither parent nor child will be taxed on any income or gains from the fund. Children are eligible provided they live in the UK, have Child Benefit claimed for them and are not subject to immigration.

Remittance basis charge
If you are not domiciled in the UK you can benefit from the remittance basis if your unremitted income and capital gains from overseas are less than £2,000 or you make a claim.

If you make a claim you:

  • will be denied your personal allowance;
  • will be denied your capital gains tax annual exemption; and
  • might trigger a £30,000 charge

All income remitted to the UK is taxable in the UK, irrespective of the basis on which you are taxed.

If you have been resident in the UK for a few years you should review your tax position so you do not unwittingly become liable for the £30,000 charge.

Leaving the UK
If you are leaving the UK and intend to become non-UK resident for tax purposes, you will need to plan carefully.
  • In recent years the tax rules on non-residence have changed and HM Revenue & Custom’s (HMRC) stance has hardened.

    You should consider the timing of your departure because residence status normally applies for the whole year.
  • Your visits to the UK should be planned carefully and it is prudent to have some ‘spare’ days in case of emergencies.

Individual Saving Accounts (ISA)
You can invest in an ISA every year. The investment does not receive tax relief but the income and gains from the investment are tax free.

The limits for ISA investments are changing.

                                                            2009/10  2010/11
 Savers aged 50 or over                       *£10,200  £10,200
 Other savers                                         £7,200  £10,200

Venture Capital Trusts (VCTs)
VCTs allow investors to spread the risk of investment into smaller companies, by enabling them to purchase shares in a quoted entity, which in turn invests in a number of smaller companies. There are also some attractive tax advantages, such as:
  • Income tax relief at 30% on an investment of up to £200,000 in a tax year.
  • Dividends are exempt from income tax (although the tax credit cannot be repaid).
  • VCT investments are exempt from capital gains tax if they are held for at least five years. 
    Professional advice is strongly recommended prior to making a decision, especially as there is no certainty that the income tax relief will be available after this tax year.

Enterprise Investment Scheme (EIS)
  • Provides 20% tax relief on investments of up to £500,000 in a tax year.
  • Investments can be carried back one year as long as the prior year limit was not reached.
  • Enables shares to be sold without suffering a capital gains tax charge as long as they have been held for three years.
  • Capital gains tax on the disposal of other assets can be deferred by reinvesting the sale proceeds in EIS shares

Charitable gifts
There are several ways in which you can donate to charity tax-efficiently. The most common is Gift Aid. Under Gift Aid the charity can claim basic rate tax relief on the grossed-up donation and you as the donor can claim tax relief at your highest rate against income tax and capital gains tax. 

Ensure you complete gift aid declarations for the charities you support, so that ad hoc gifts can be tax efficient.
If you are married and you have different income levels make sure any charitable giving is undertaken by the spouse with the highest income level.
The rules for higher rate relief on gift aid payments is being reviewed so you may like to make any large payments prior to 6 April 2010 to ensure higher rate tax relief is available. Before doing this see our section on 50% tax rate and personal allowance restriction (link), because there can also be advantages to deferring payments until after 5 April 2010. 

Furnished holiday lettings (FHL)
On 6 April 2010 the beneficial tax rules for FHL are being withdrawn. Anyone with a UK or European Economic Area FHL should look to maximise their tax advantage prior to the withdrawal.

Pension contributions
From April 2011 tax relief on pension contributions is to be restricted for individuals with income of £150,000 or more.

Prior to then anti-forestalling rules have been implemented. These potentially restrict the higher rate benefit of higher rate tax relief on annual pension contributions of more than £20,000. The anti-forestalling rules must be considered where income in the year, or either of the two previous years is £130,000 or more.

You should consider:

  • Paying maximum pension contributions in 2009/10 and 2010/11
  • Making stakeholder payments for children and non-earning spouse
  • Those with flexible incomes should seek advice 

Capital Gains Tax

Annual exemptions
Where possible and subject to financial advice you should endeavour to make sufficient capital gains each tax year to utilise your full annual exemption. For 2009/10 the annual exemption is £10,100.

You should try and time losses so that they are not automatically set against gains which would otherwise be covered by the annual exemption.

Jointly held assets
Where gains are expected on assets held jointly by husbands and wives or civil partners you should consider who should make the disposal so as to use both spouses annual exemptions and protect any losses.

Spouses and civil partners are taxed separately on capital gains, but any transfers between them are undertaken on a no gain/no loss basis.

Where an inter-spouse or inter-civil partner transfer occurs close to the sale of an asset you need to seek professional advice to prevent breaching anti-avoidance rules.

Entrepreneurs’ Relief
As a business owner you should ensure you seek advice in good time prior to any sale to maximise your Entrepreneurs’ Relief.
  • Entrepreneurs’ Relief is aimed at small business owners and, as always, there are conditions which have to be met, but basically where a sole trader; or
  • partner in a partnership; or
  • shareholder of a trading company; owning at least 5% of the shares and being an employee or officer of the company
    sells their business or share of the business, the first £1 million of gain will be charged to tax at 10% rather than the flat rate 18% (the remainder will be taxed at 18%).

The maximum value of the relief is £80,000 ({18% - 10%} x £1m).

The £1 million is a lifetime allowance and can be used on more than one occasion and only includes gains arising on or after 6 April 2008.

The relevant conditions must be met for a period of one year.
Where a business ceases, relief will be available on gains on assets formerly used in the business and disposed of within three years.

Associated disposals
An associated disposal is one where an asset is disposed of at the same time as a qualifying disposal of an interest in a partnership or company and is made as part of the individual’s withdrawal from the business.

The relief due on an associated disposal will be restricted in certain circumstances, for example,

  • where the asset in question is not wholly in business use or
  • where the individual is not involved in carrying on the business (as an officer or employee of the company with a qualifying interest in it) throughout the period during which the asset was owned, or
  • there has been rent charged since 6 April 2008.

The conditions required to enable the full gain on a disposal to qualify for Entrepreneurs’ Relief can be complicated. To ensure you maximise your relief and minimise your tax exposure now and in the future you should obtain professional advice.

Timing of losses and negligible value claims
Where possible, if you are holding assets with accrued losses these should be crystallised in a tax year where substantial capital gains have been made to ensure that the Capital Gains Tax payable is kept to a minimum.

Where an asset has become of negligible value and the loss has not been crystallised in year, you may still be able to take action after the end of the tax year. An election can be made to crystallise the loss within the following two tax years as long as the asset was of negligible value by the end of the relevant tax year.

Where subscribed shares in unquoted trading companies have become of negligible value, losses may be able to be set against income in the same or previous tax year. 

Set off of trading losses

Where an individual has suffered a trading loss on their self-employment it can be offset against any capital gains for the same year as long as any loss claim is first made against income of the same year.

Therefore if you anticipate that you will make a trading loss for the year to 5 April 2010 you may like to realise capital gains for the same period to be offset.

Inheritance Tax (IHT)

With an upcoming general election questions are automatically raised about what will happen to IHT. From the latest murmurs it appears that initially nothing, but if a new Government is formed within the next few months, it will probably be in 2011 that we see changes.

It is a good idea to review your IHT position regularly….so here are some of the things you should be thinking about.

Annual exemptions
All taxpayers have an annual IHT exemption (£3,000 for 2009/10).Therefore a married couple is able to gift £6,000 without it affecting their IHT position. Any unused part of the £3,000 exemption can be carried forward to the following tax year, but if it is not used in that year, the carried-over exemption expires.

There are other annual exemptions which you should consider using, such as:

Gifts to charity                                          unlimited
Small gifts to different individuals                 £250
Gift on marriage  By parent                        £5,000
 By remote ancestor                                   £2,500
 By another person                                    £1,000

Gifts out of income
Any regular gifts you make out of your after-tax income, not including your capital, are exempt from IHT providing they leave you with sufficient income to maintain your usual standard of living.

These include:

  • monthly or other regular payments to someone
  • regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
  • regular premiums on a life insurance policy - for you or someone else

Transfer of Nil Rate Band (NRB)
From 9 October 2007 it is possible for any part of the NRB not utilised on the death of the first spouse to be transferred to the surviving spouse for use on their death. The transferable allowance will be available to all survivors of a marriage who die on or after 9 October 2007, no matter when the first spouse died/dies. The maximum available to be transferred is 100% of the NRB applicable to the tax year in which the surviving spouse dies. Although if the first spouse died before 1975, when Estate Duty was in existence, the full NRB may not be available to transfer, as the amount of spouse exemption was limited.

The transfer is not automatic and therefore must be claimed. Any claim for transfer must be made within two years of the death of the second spouse. 

Documents required

The documents required to support a claim, and to calculate the amount of the unused NRB available, include:
  • The death certificate of the first spouse to die;
  • The marriage certificate or civil partnership certificate;
    and, if applicable
  • A copy of the first spouse’s Will;
  • A copy of the grant of probate/Confirmation; and
  • A copy of a Deed of Variation or other similar document which was executed in order to change the beneficiaries of the first spouse’s estate

It is important to gather these documents before the second spouse’s death, as they may be even more difficult to obtain after this date. 

Business Property Relief (BPR) /Agricultural Property Relief (APR)

Assets which qualify for BPR and APR can attract up to 100% tax relief on transfer both during lifetime or on death. Generally assets have to be held for two years to be able to qualify for either BPR or APR. The conditions that have to be met for assets to qualify for either relief can be complicated therefore professional advice should be sought in plenty of time before any transfer.