Practical Tax Planning Strategies - 01/06/2009
From 2010, the personal allowance on incomes over £100,000 will be reduced by £1 for every £2 of income over the limit. Incomes over £150,000 will also be subject to a top rate tax of 50 percent – a double whammy for higher earners.
To ensure you keep as much of what you earn as possible, we have examined the opportunities for practical tax planning. Read on to find out how we can help reduce your tax bill…
- If you are part of couple with one higher-tax payer and one lower paying one, transfer any assets from the higher payer to the lower one.
- To avoid being charged tax on global assets once you have been a UK tax-paying resident for seven years, you need to pay £30,000 to ensure offshore income not brought into the UK is not taxed.
- If you have been resident for less than seven tax years, you automatically qualify for this. Additionally if your income and gains left overseas are less than £2,000, you can bring income into the UK indirectly.
- For 2009/10, there is a low tax rate for cars with emissions less than 120g of CO2 per km. If you have free private fuel, it is almost certainly worth changing your package to give this up.
- Investments in Venture Capital Trusts and the Enterprise Investment Scheme (EIS) qualify for income tax relief of 30 and 20 percent respectively.
What ways are there to make the most of your CGT exemption?
- For gains made on the disposal of a business, Entrepreneurs’ Relief can bring the tax rate down to 10 percent for the first £1 million of gains.
- Selling a garden of less than half a hectare is exempt from CGT, but if you sell your house first, then you lose the exemption. The property will also qualify for CGT exemption, even if you have lived elsewhere or let it.
- Transfers between spouses and civil partners are also exempt from CGT, even if you have separated.
- If you have a large share portfolio, it can be worth realising gains to use up the annual CGT allowance.
So how can you ensure you don’t pay back all these savings when you die?
- The most well known way of avoiding paying Inheritance tax (IHT) is by giving assets away at least seven years before your death.
- However, putting assets and lump sums from pensions into trusts can be beneficial, as this also takes them out of the estates of your beneficiaries.
- If you set up a regular pattern of giving away surplus income, then those gifts would be outside your estate even if you didn’t survive for seven years.
- Commercial woodlands and some farmland are exempt from IHT, as long as you hold on to them for two years.
- As surviving spouses now inherit any unused nil-rate band from their deceased partner, leaving everything to your spouse is more tax-efficient.
- Other products worth considering include equity release schemes to pass on some of the value of your home and discounted gift trusts.
- If the deceased’s will is tax-inefficient, it can be rewritten using a Deed of Variation up to two years after the death.
- Any gifts to charity in your will are exempt from IHT. However, if you make the gift before your death, you can save the IHT and get Income Tax relief too.
Now we’ve looked at personal tax, let’s consider business tax:
- Making family members shareholders or partners in the family firm will move income from high-rate taxpayers to non-payers.
- Businesses can also sell shares in subsidiary companies and not pay tax on the gains as long as they remain trading after the sale.
- It is best to buy equipment for your business just before your year-end rather than after, as you receive the tax allowances a year earlier.
- If your company carries out research and development, then the allowances are now higher than for previous years.
- For firms with a pension scheme that employees contribute to, you can save on National Insurance Contributions by paying the employees’ contributions for them, and reducing their wages accordingly.
A few other issues relating to pensions are also worth noting:
- The government will restrict tax relief on pension savings from 6th April 2011 for those with incomes over £150,000.
- However, the Government is introducing new rules from 22nd April 2009 to remove the advantage to individuals of increasing their pension contributions in excess of their normal pattern before the relief is introduced in April 2011.
- From April 2009, contracted-out rights awarded as part of a pension sharing order on divorce are treated in exactly the same way as other shared rights.
- It is also worth noting that the annual ISA investment limit has risen to £10,200, of which £5,100 can be saved in cash.
To conclude, we’ll take a look at VAT and the changes being introduced.
- At the end of 2009, VAT will revert back to 17.5 percent.
- 1st January 2010 will also bring changes to the way VAT is dealt with for cross-border trade. Under the new rules, business to business services will become taxable in the country where the customer is based.
- Companies engaged in cross-border transactions will also be able to reclaim foreign VAT electronically in their own member state from 2010.
Two other important measures came into force this April that you need to be aware of to ensure your VAT returns and records are correct.
- From 1st April 2009, new penalties for not paying the right amount of tax on time have been introduced. Any penalty charged will be a percentage of the additional tax due, up to 100 percent.
- From 1st April 2010, the time limit for both HMRC’s ability to make tax assessments and a taxpayer’s ability to make claims is increased to four years. This limit will also apply to Income Tax, CGT and Corporation tax.
If you would like to discuss the above in more detail or to check how the changes may affect you personally, please do not hesitate to contact us.
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