Maximising your use of available tax reliefs and allowances

We are living in tough economic times with the Coalition Government’s attempts to reduce the Budget deficit through wide reaching tax rises and public expenditure cuts starting to hit home hard. It is now therefore more important than ever that we take full advantage of the tax reliefs and allowances available to us. The end of the tax year on 5 April is looming on the horizon, but there is still time to review your affairs and take action before this year’s tax breaks are lost for good. There may also be some simple but effective tax planning measures to put in place now to help save you tax in the 2011/12 tax year.

Income tax

Individuals

• Higher (40%) and additional rate (50%) taxpayers should consider reviewing their own personal tax position with that of their spouse, civil partner and/or other family members.
• The transfer of certain income-producing assets to other family members may be attractive if they are non-taxpayers or subject to lower rates of income tax. This strategy could result in an income tax saving of up to 50%. A parent will still, however, be subject to income tax on income arising from assets gifted to a minor, unmarried child where the amount of income arising is more than £100.
• Family businesses provide a number of opportunities for both owners and employees to control their income tax exposure. Family members could be introduced to the family business as co-owners, partners or employees and provided with some form of remuneration. Salary, profit share or dividends may then be taxable at lower rates of tax e.g. basic rate taxpayers pay no additional income tax on dividends. It is important that this remuneration is justifiable and genuine in practice and that any transfers of assets between family members is outright.
• Owners of family companies could consider declaring a dividend rather than taking additional salary in order to minimise their exposure to income tax and national insurance.
• Individuals earning more than £100,000 per year should be aware that their personal allowance is reduced by £1 for every £2 their taxable income is above £100,000. Tax-efficient pension contributions (see below) are a way to protect the personal allowance.
• It is important to consider the other tax implications on any proposed transfer of assets (e.g. capital gains tax and inheritance tax) and also the fact that you no longer have ownership or control of those assets in the future.

Capital gains tax (CGT)

• Individuals have an annual CGT exemption of £10,100.
• Gains realised by higher rate taxpayers in excess of their annual exemption are currently subject to CGT at a rate of 28%.
• Gains realised by basic rate taxpayers are subject to CGT at a rate of 18% if they fall within their available basic rate band once their taxable income has been taken into account (2010/11: £43,875). Gains in excess of the basic rate band limit are taxed at 28%.
• Splitting disposals over two tax years or delaying triggering gains until the next tax year may enable you to benefit from two CGT annual exemptions and/or delay the payment of CGT by another 12 months to 31 January 2013.
• Transfers between spouses and civil partners are CGT-free. Spouses and civil partners should therefore consider making transfers between each other prior to any planned disposals in order to take full advantage of available CGT exemptions and/or a lower rate of CGT. Again, transfers of assets must be outright.

Inheritance tax (IHT)

• An individual can make annual IHT-exempt gifts of up to £3,000 each year, with any unused relief being carried forward for one year e.g. up to £6,000 may be available in the 2010/11 tax year if no gifts were made in the 2009/10 tax year.
• There are also a number of other forms of IHT-exempt gifts including small gifts of up to £250 per person and gifts to charities.
• Gifts out of your surplus income will also qualify for IHT exemption if they satisfy certain conditions.

Pensions

• Tax relief is available on pension contributions within an individual’s annual allowance. Income and capital gains arising in pension funds are generally tax-free.
• Pension contributions can be made on behalf of anyone of any age, including children. Contributions of up to £3,600 gross (£2,880 net) per year can be paid by non-earners.
• If you earn more than £3,600, you can pay up to the whole of your earnings into a pension scheme, but the relief is capped by the annual allowance which is to be reduced from £255,000 to £50,000 in the 2011/12 tax year.
• Non and basic rate taxpayers should receive 20% income tax relief on their pension contributions. Higher or additional rate taxpayers may be able to claim tax relief of at least 40% or 50%, subject to limits on the amounts which can attract relief in 2010/11 for those earning over £130,000.
• The maximum that can currently be held within a tax-favoured pension scheme is £1.8 million. It is expected that this will be reduced to £1.5 million with effect from 2012/13.
• It is important to take specialist pension advice prior to making any additional pension contributions.

Investments

Individual Savings Accounts (ISAs)

• ISAs as an investment vehicle offer a range of benefits including tax-free income and capital gains, and easy access to your money.
• An individual can invest up to a total amount of £10,200 in an ISA in the 2010/11 tax year (2011/12 : £10,680).
• Individuals can invest in cash ISAs or stocks and shares ISAs. Up to £5,100 can be invested in a cash ISA (2011/12 : £5,340) with the balance being invested within a stocks and shares ISA.
• All UK residents aged 18 or over can invest in a stocks and shares ISA. Cash ISAs are available to those aged 16 or over.

Enterprise Investment Schemes (EIS)

• The EIS offers tax incentives for investment in new shares of qualifying unquoted trading companies.
• Income tax relief is given at 20% on qualifying investments of up to £500,000 in the 2010/11 tax year i.e. a potential tax saving of up to £100,000. The minimum investment to qualify for relief is £500.
• CGT deferral relief may be available for capital gains arising on the disposal of other assets in the three years prior to the EIS investment.
• There should be no CGT on gains arising from the disposal of qualifying EIS shares after three years of ownership.

Venture Capital Trusts (VCT)

• VCTs are a form of investment trust that invests in a range of relatively small trading companies.
• Income tax relief is given at up to 30% on qualifying investments of up to £200,000 in the 2010/11 tax year i.e. a potential saving of up to £60,000.
• There is no CGT deferral relief available, but capital gains arising on the disposal of the VCT shares themselves should be CGT-free if the shares have been held for a minimum period of 5 years.
• Dividends from VCTs are free of income tax.

It is important that potential investors in EIS companies and VCTs are aware that these investments are generally favoured by higher risk investors, who are prepared to tie their money up for a number of years in exchange for attractive tax reliefs.

Unit Trusts and OEICs

• Investments offering potential capital growth rather than income returns may be attractive to taxpayers looking to minimise their exposure to higher rates of income tax.
• Capital gains arising within unit trusts and OEICs are CGT-free. There may still, however, be a CGT liability on the eventual disposal of the investments.
• Income (i.e. dividends and interest) is taxable whether or not it is accumulated or paid out. Basic rate taxpayers will, however, have no further tax liability.

We would strongly recommend that you seek specialist advice tailored to your own circumstances before taking any action.

For further advice, please contact Colin Henderson, Alec Stewart or Martin Campbell, or speak to your usual Anderson Strathern contact. 

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.