Tax Year End Planning

INTRODUCTION

The current tax year ending 5 April 2011 heralded the introduction of the 50% top rate of tax for individuals with income in excess of £150,000 per annum, and also the total loss of the personal allowance for those whose income exceeds £112,950.  This, together with other tax changes, such as the introduction of the 20% VAT rate at the beginning of the year, is all part of a package of austerity measures introduced by the Government designed to reduce the Budget deficit.

Individuals who fall into the 50% tax bracket mentioned above, should consider a number of opportunities that are currently available to mitigate the effect of these tax increases.  Reducing the tax burden however is not limited to those with high income, and should be carefully considered by individuals paying tax at the 20% and 40% rates.

In December 2010 the Office of Tax Simplification issued an interim report setting out a review of tax reliefs.  They collated a list of 1,042 tax reliefs that are currently available.  The Coalition Government has asked them to produce a report recommending whether these reliefs should be abolished, modified or improved.  This is all part of the present Government's drive to simplify the tax system, and many of the recommendations for change are expected to be included in next month's Budget.  It is conceivable therefore, that some of the tax-saving opportunities that are currently available may be withdrawn.

We therefore have pleasure in producing the following resumé of options to consider by 5 April 2011.  This is not designed to be an exhaustive list, and a number of recommendations may already be known to you.  However, we hope you will read this document and consider carefully whether you would like to take advantage of the tax saving opportunities which are currently available.

INCOME TAX

• Pension Contributions

Consider paying into, or topping up, your pension plans.  For individuals with income below £130,000 per annum, there is the ability to still pay significant contributions into pension schemes.  For those above that figure, contributions of up to £30,000 can be made with tax relief at your marginal rate.  Please remember that there is now no longer the facility to pay a pension contribution and carry it back to the previous tax year.

• Individual Savings Accounts (ISA's)

Individuals aged 18 or over (16 or over in the case of cash accounts) can contribute up to £10,200 into an ISA in 2010/11.

• Venture Capital Trusts (VCT's)

Tax relief is available at a rate of 30% on investments of up to £200,000.  There are also Capital Gains Tax advantages (see below).

• Enterprise Investment Schemes (EIS's)

For total investments of up to £500,000 tax relief is available at a rate of 20%.  In addition, there are Capital Gains Tax advantages (see below) of making an investment.

• Deferring Income

Individuals paying tax at 50% should consider diverting capital into assets designed for capital growth rather than income.  Investment bonds, for example, are a wrapper to defer tax charges to a later date, when you may be either a lower rate tax payer, or no longer resident in the UK.

• Gift Aid

Donations under Gift Aid continue to attract higher rate tax relief.

PLANNING POINT

Pension contributions, or Gift Aid payments can be extremely attractive for individuals whose total income is just over £100,000.  The effective rate of tax on income between £100,000 and £112,950 is 60% due to the loss of the personal tax allowance.  Making these payments could take your income below £100,000 so you retain the full allowance.

CAPITAL GAINS TAX (CGT)

• Annual Exemption

Each individual has an annual CGT allowance, currently £10,100 per annum.  It is important if you have share, unit and investment trust portfolios etc., that you ensure that the exemption is utilised wherever possible.

• Pension Contribution

Pension contributions can reduce in certain cases the amount of CGT payable (see Planning Point below).

• Venture Capital Trusts (VCT's)

Gains of VCT's which are held for at least 5 years are exempt from CGT, so long as the investment retains its VCT status.

• Enterprise Investment Schemes (EIS's)

Gains on EIS's held for more than 3 years are exempt from CGT to the extent that income tax relief was given on the shares.

CGT deferral relief is available for gains on assets where the disposal proceeds are re- invested in eligible shares in qualifying EIS companies.

• Entrepreneur's Relief

Business owners who make qualifying disposals of business assets pay CGT at only 10% up to a lifetime limit of £5m.

PLANNING  POINT

For gains on disposals of non-business assets realised since 23 June 2010 there are two rates of tax, 18 and 28%.  The 18% tax rate is charged on gains for individuals whose total income, including the Capital Gain, are only liable to 20% income tax.  Higher rate tax payers are charged at 28%.  The payment of pension contributions, and Gift Aid donations can extend an individual's basic rate band, so more gains can be charged at the lower 18% rate.

INHERITANCE TAX (IHT)

• Annual Gift Exemption

Each individual can give away £3,000 per annum and this gift is exempt from IHT.  If the exemption was not used in 2009/10 it can be carried forward to the current year, effectively doubling the exemption to £6,000.

• Regular Gifts out of Income

These gifts are also exempt if they are made from surplus income, and leave the transferor with sufficient income to maintain his usual standard of living.

• Gifts in Consideration of Marriage

Each parent can give £5,000, relatives £2,500, and other persons £1,000, which are all exempt transfers.

• Gifts to Certain Other Bodies

Gifts to Registered Charities, Political Parties and other certain National Bodies are exempt from IHT without limit.

• Potentially Exempt Transfer (PET's)

Gifts which do not qualify the exemptions mentioned above, can be made IHT free subject to the transferor surviving 7 years, and other certain conditions applying.

• Gifts into Discretionary Trusts

These can be also extremely tax efficient in certain circumstances, particularly if the gift is an asset which would be liable to CGT on transfer.

PLANNING POINT

In order to maximise the IHT planning opportunities, and minimise the tax it is essential that you have a valid Will.  This becomes even more important if you are either married or in a registered civil partnership.  Where there are minor children involved, the absence of a Will could in some cases result in creating an IHT charge.

CONCLUSION

We trust that you have found this summary to be both helpful and thought provoking.  If there are aspects raised which you would like to discuss further with us, please contact either Brian Reeves or Sonia Jupp in our Richmond Office, of Peter Sarney in Windsor.  We would also mention, that if there are any tax saving opportunities which involve the provision of investment advice, we can also provide this service.

The information contained in this document is for general use, and not intended to provide specific tax or financial advice.  All information is based on current legislation and HMRC practices and is subject to change.  The value of investments and the income derived from them may fall as well as rise, and you may not get back the full amount you invest.  Past performance is not a guide to future performance.