February '11 tax planning fact sheet

Year End Tax Planning

The end of the tax year is a good time to look at your financial affairs. There are opportunities for planning and to reduce your tax liabilities and so we thought you may find the brief guide below useful.

If you would like to discuss anything in more detail, please do not hesitate to contact me on 020 8652 2450 or via email at crg@clarksonhyde.com.

Kind regards.

Charles Green
Tax Partner

The Clarkson Hyde Year End Tax Planning Guide

Income tax

Personal tax allowances, reliefs and tax bands

  • You should ensure that you maximise use of the tax-free personal allowance (basic £6,475) and lower tax threshold (£37,400)
  • Those with income over £100,000 will lose their personal allowance at a rate of £1 for every £2 over the income limit of £100,000. Take action to avoid the effective 60% marginal tax rate on a band of income of around £13,000
  • Those with income over £150,000 should take action to mitigate the impact of the new 50% tax band (42.5% for dividend income)
  • Check whether it is a good idea to pay a dividend or vote additional salary to yourself or your spouse/partner before the end of the tax year
  • Consider transferring income-generating assets to a spouse/partner with little or no income. Capital and the related income can normally be transferred between husband and wife or civil partners without any tax liabilities. Such transfers must be outright gifts and can be made free of both capital gains tax and inheritance tax
  • Consider one-off or recurring donations to charity
  • Consider making pension contributions or tax efficient investments to reduce tax liabilities at the higher rate (see below)

Benefits in kind

  • Ensure that any directors' loan account balances over £5,000 are reduced before the end of the tax year to restrict any benefit in kind charge
  • Consider reimbursing your employer for the full cost of private petrol to prevent the car fuel charge applying

Capital allowances

  • The end of your accounting year will govern when tax relief can be claimed on capital expenditure. If the end of your accounting year coincides with the tax year, consider making capital purchases prior to 5 April 2011. A purchase just before the end of the current accounting year will usually mean the allowance is available a year earlier than would be the case if the purchase is made just after the year end

Tax credits

  • If the level of your income entitles you to tax credits you should make a claim immediately as benefits cannot be back-dated more than 3 months
  • If you believe your income may be less than expected for 2011/12, you should think about making a protective claim for tax credits before 6 July 2011. This is particularly relevant for those with children who are self employed, subject to income level changes (eg threat of redundancy) or subject to variable income

Pensions

Many pension rule changes apply from 6 April 2011 including:

    • The complex anti-forestalling measures and high income excess relief charge legislation will no longer apply. Tax relief will be given at your highest marginal rate
    • The annual allowance (AA) will be reduced from £255,000 to £50,000
    • A three year carry forward facility is being introduced. This will allow individuals who have been members of a registered pension scheme to use unused annual allowances from the three preceding years (maximum £50,000 pa)
  • Check that your pension arrangements are adequate, especially if you are self employed or not in a company scheme
  • If you don't already have a pension arrangement in place, consider starting one before 5 April to enable 2010/11 to participate as a qualifying year for the purposes of the new carry forward facility
  • Net pension contributions up to £2,880 (equivalent to £3,600 gross) are automatically allowed for the current tax year
  • Higher contributions of up to 100% of earnings up to a maximum annual allowance of £255,000 gross can be made prior to 5 April 2011 but the complex anti-forestalling rules still apply to 2010/11 for those with incomes over £150,000 (as defined). Please contact us for further assistance in this area

Tax Efficient Investments

  • Consider opening an Individual Savings Account (ISA) to provide tax-free income or capital gains. There are two types of ISA, cash only and a combination of stocks, shares and cash. The overall annual allowance is £10,200 providing the cash element does not exceed £5,100. The allowances increase to £10,680 and £5,340 with effect from 6 April 2011
  • If you are willing to invest in higher risk investments, you can obtain 30% income tax relief on shares subscribed for in Venture Capital Trusts (VCTs) up to a maximum of £200,000 pa and held for at least five years. Dividends and capital gains are tax free but, if a capital loss is realised, it is not allowable for capital gains tax purposes
  • Also consider Enterprise Investments Schemes (EISs) as alternative higher risk investments offering tax breaks. Providing certain conditions are met, you can obtain 20% income tax relief on qualifying investments of up to £500,000 pa. An EIS investment can defer capital gains tax or obtain repayment if gains have been made within the last three years. After two years the shares in an EIS are treated as business property for inheritance tax purposes and are therefore granted 100% exemption from IHT while they continue to be held

Capital gains tax

  • Maximise use of the annual exemption of £10,100. If the proceeds are to be re-invested in replacement investments, beware of the 'bed and breakfasting' rules but there is nothing to prevent repurchases being made by a spouse or civil partner or by an existing ISA
  • Consider the timing of disposals. Deferral until after 5 April 2011 will delay capital gains tax payment date by a full year
  • If you intend to retire from business in the next few years, consider whether you are eligible for Entrepreneurs’ Relief which charges tax at 10% on a lifetime limit of gains of up to £5m. Given the complexity of the qualifying conditions, it is important to plan ahead particularly where there is scope to extend the relief to family members
  • If you have more than one home, consider making or revising an election to determine which one will qualify for the CGT exemption
  • Claim losses on assets that have become worthless
  • Consider EIS deferral relief, which allows you to defer gains on disposal of any chargeable asset against investment in new ordinary shares in a qualifying unquoted trading company

Furnished Holiday Lets

  • Losses made after 5 April 2011 can only be set against future profits from the same furnished holiday letting business (either UK or EEA based) and cannot be relieved against other income sources. Consider advancing expenditure eg repairs to 2010/11
  • Note the change to the lettings condition from 6 April 2012. From 2012/13, the property must be let commercially as furnished holiday accommodation for 105 days pa (currently 70 days pa) and be available for letting for 210 days (currently 140 days)

Inheritance tax

  • Review your will and estate planning strategy
  • Consider lifetime gifts to individuals or trusts (gifts to spouses/civil partners domiciled in the UK are exempt)
  • Maximise business property relief and agricultural property relief
  • Life assurance policies can be used as a way of making gifts to beneficiaries, and also to build up sufficient money to pay any IHT that may eventually become due
  • The annual £3,000 exemption applies to both husband and wife and can be carried forward for one year, but then used only if the exemption for the later year is utilised
  • Other reliefs are: £250 small gift exemption, marriage gifts exemption, normal expenditure out of income, and gifts for charities, national purposes, public benefit, and political parties

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