21 Tax tips for 2010/11
The start of a new tax year is the ideal time to structure your finances and ensure that pay the minimal amount of tax in the coming year. When those with taxable income exceeding 100,000 are losing their Personal Allowance and those earning over £150,000 subjected to 50% Income Tax, expert financial advice has never been more important. Below are 21 ideas illustrating how you can reduce your tax liabilities.
1. Individual Savings Accounts (ISA)
The ISA Allowance has increased to 10,200.
This can all be invested with one provider into Equity ISA or split between two providers up to £5,200 into Cash and the balance into Equity ISA.
ISA’s are virtually tax free. They are not subject to any Capital Gains Tax (CGT) and are free from personal Income Tax. Dividends received within the fund are subject to 10% divined tax.
If you do not utilise your full allowance you cannot carry it forward.
2. Cash
Funds held in deposit accounts are subject to 20% Income Tax at source, the interest earned by higher rate tax payers will be subject to either 40% or 50%.
Cash deposits should be held within an ISA, or within an Offset mortgage, which are not subject to Income Tax.
For married couples if one partner is a non or basic rate tax payer the account should be held in their name.
3. Inter-spousal transfer
Inter-spousal transfers are tax free.
When disposing of an asset that has a changeable gain, the asset can be transferred in part or in full to a spouse. Should the spouse then dispose of that asset it will be subject to their individual tax, spreading and reducing the tax payable.
4. Venture Capital Trusts (VCT)
VCTs are quoted limited companies whose purpose is to invest shareholders’ funds in smaller unquoted trading companies, (including AIM listed stocks) having potential for growth.
Income Tax relief- Individuals who subscribe for new ordinary shares in a VCT are granted income tax relief at 30% on up to £200,000 pa subject to their having sufficient income tax payable to absorb the relief.
The tax relief is due when the shares are issued and can be given by an adjustment to the PAYE coding, or a claim in the tax return.
5. Share Option Schemes
When a Save as You Earn (SAYE) scheme matures individuals have 90 days to transfer the shares into pension and/or ISA tax free.
6. Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) is a government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies.
Income Tax relief -Provided an EIS qualifying investment is held for three years, an individual can reduce their income tax liability by 20% of the amount invested. The maximum subscription is £500,000 per tax year.Individuals may elect to treat their subscription forEIS shares, up to their maximum annual allowance, as if made in the previous tax year, thereby carrying income tax relief back one year.
No CGT on disposal- If a qualifying individual holds the investment more than three years any capital gain on the disposal of the EIS shares after that period will be tax-free. Further, if a loss arises on the disposal of EIS shares then, this can either be claimed as a capital loss or as a loss for income tax purposes.
Deferral of tax on other Capital Gains- CGT on a gain from the disposal of any asset can be deferred against an EIS share subscription. The tax on any gain rolled over in this way only becomes due on disposal of the EIS shares; the amount of the gain which can be deferred is unlimited. To qualify for deferral relief the investment must be made during the period one year before the realisation of the gain to three years after.
7. Investing into Woodland
Investing in commercial woodland attracts the flowing tax advantages:
Capital Gains Tax-As the timber grows it will increase in value. This increase is exempt from capital gains tax, but any increase in the value of the land is not exempt.
Income Tax- Any income or profit generated from woodland is exempt from income tax.
Inheritance Tax- Commercial Woodlands (including both land and timber) qualify for 100% Business Property Relief provided they have been owned for at least 2 years.
8. Non income producing investments
Investing into non-income producing assets will avoid additional liability to Income Tax, this is especially important if income is boarding the £100,000 threshold.
For example, investing into Open Ended Investment Companies (OEIC’s) that do not have a yield will mean that the investment is not subject to Income tax. The gains are subject to Capital Gain Tax on disposal. Should income be required units can be encashed to provide withdrawals that are not subject to Income Tax. Encashment can be carried out over two or more tax years to avoid paying CGT.
9. Capital Gains Tax (CGT)
Every individual has an annual Capital Gains Tax (CGT) allowance for tax year 2010/11 this is £10,100. Gains with this allowance will be taxed at 0% gains in excess of the allowance are taxed at 18%.
Capital losses can be carried forward indefinitely and offset against capital gains made in current tax year
10. Offshore
Investing into certain offshore investments allow the gains to roll up gross. The gains made will be subject to tax when they are repatriated. Individuals who are currently higher rate tax payers and are likely to become basic rate tax payers in the future could invest in offshore investments bringing the investment back onshore at a time when they are basic rate tax payers.
11. Pension
Individuals under the age of 75 can invest up to £3,600 gross per annum and receive 20% Income Tax relief therefore the individual would pay £2,880.
Individuals with income between £3,600 and £130,000 can pay up to 100% of their earned income into pension and received Income tax relief at their highest marginal rate.
Individuals with earnings in excess of £130,000 could be restricted to the level of pension contributions they are able to pay and should seek advice regarding the level of contributions they are able to make.
12. Children’s Pensions
Investment into pensions on behalf of a child will receive the 20% income tax relief even though they are likely to be non-taxpayers.
Parents and Grandparents can utilise £2,880 of their Inheritance Tax annual gift allowance (see point 18) to invest into pension on behalf of a child, reducing their estate for IHT purposes and gaining 20% Income Tax relief for the child.
13. Shares into Pension
Individuals that hold single company shares can invest them into pension (as an alternative to investing cash) and avoid paying higher rate of Income Tax on the dividends received from the shares.
14. Salary Sacrifice
Employees who utilise salary sacrifice to fund their pension will reduce the amount of National Insurance that they and their employer pays.
15. Input Periods
All registered pension schemes have a scheme input period, for money purchase schemes the pension input is the individuals and employers contributions that are made within a given period, usually 12 months coinciding with the tax year.
The contributions are assessed against the annual allowance for that tax year. It is possible to alter the input period make pension contributions that are subject to different tax years allowances. This allows individuals to contribute a greater amount into pension.
16. Employer-Financed Retirement Benefit Schemes (EFRBS)
EFRBS do not fall within the rules applicable to registered pension plans and therefore the employer can fund in excess of the annual and lifetime limits, EFRBS can be used as a profit extraction mechanism. With no maximum contribution limit and contributions not being liable to income tax, the employee can potentially make a significant saving.
- Employer contributions are not taxable as remuneration in the hands of the employee
- Employer contributions are not subject to UK National Insurance
- Any contributions made to the EFRBS obtain a deferred corporation tax deduction
- If the EFRBS is structured offshore, the fund can accumulate mainly tax-free
17. Income recycling
Those over 55 can draw up to 25% of the value of their pension fund tax free and commence drawing income from the balance. The 25% could be used to clear debt, or be re-invested outside of a pension.
The income is subject to tax at the individual’s highest marginal rate. The income can be re-invested back into a pension scheme and receive income tax relief at the individual’s highest marginal rate making it tax natural. However, the pension fund will continue to grow tax free and build up a further entitlement to draw a further 25% pension commencement lump sum tax free.
18. Wills and Trusts
Ensure that Wills are up to date and take advantage of current legislation, you your estate doesn’t fall foul of the instate rules.
Married couples are able to claim two nil rate bands, for larger estates more complex planning is required to reduce the impact of IHT.
Creating trusts and passing the benefits from pensions, death in service schemes, life assurance plans and attests into trust can be a tax efficient way of passing larger estates to loved ones. This will require the advice of a good solicitor and financial planner.
19. Inheritance Tax (IHT) allowances
Each individual can gift £3,000 per tax year without incurring an IHT liability. It is possible to carry forward any unused allowance can be carried forward one tax year.
Individuals can make unlimited gifts from regular income as long as it does not affect their life styles.
20. IHT Investments
Assets transferred/ gifted in excess of £3,000 are known as Potentially Exempt Transfers (PET’s). PET’s remove the assets individuals taxable estate after seven years.
Investing into certain assets e.g. AIM listed shares or investments that benefit from business property relief would remove the assets from the estate after the two years and if they are still held at the date of death will be free of IHT.
21. Duel Contracts
Individuals who have a non-UK domicile and work partly in the UK and partly abroad can benefit from having dual contracts. They work in the UK under a contract with their UK employer but carry out their work abroad under a separate contract with a non-UK employer. The earnings from the non-UK contract earned abroad can then, by election, be taxed only on a remittance basis. Long term residents with a non-UK domicile may have to pay the £30k levy to qualify for the remittance basis.