THE GOVERNMENT IS KEEN that there should be transparency in the tax system and is planning to publish a personal tax calculator on the HMRC website next April to help taxpayers understand how much tax they pay.
No doubt many will be surprised by how much they do pay, which raises the question of what they can do legally to reduce the sums paid. Here are some of the less well-known reliefs available to individuals and businesses that should be borne in mind throughout the tax year.
Most business owners will be familiar with the concept of claiming capital allowances on plant and machinery actually used in the business, for example computers. However it is less well known that capital allowances can also be claimed on certain embedded fixtures within the building itself, like lifts, air conditioning, toilets, electrical and cold water systems.
Currently there is no deadline for lodging the claim to capital allowances on embedded fittings, provided those fittings continue to be used in the business. However strict deadlines are likely to be introduced next year and you should move quickly to establish your claim.
Also watch the timing of expenditure qualifying for the Annual Investment Allowance as the limit reduces from £100,000 to £25,000, with effect from 6 April 2012 (1 April for companies). Care is needed with how the pro-rating of these amounts operates for accounting periods spanning this date.
CGT entrepreneurs’ relief
This has become a very attractive relief with lifetime gains of up to £10 million charged to CGT at 10% rather than 28%. However the rules are very tightly drawn and relief will not be due unless all the conditions are met. For example a shareholder must own 5% of the shares (and the voting rights) and be an employee or director for the year up to the date of disposal. So stepping down as a director a few weeks before selling the shares will mean that the 10% rate will be lost. Another pitfall if where a husband and wife jointly own a potentially qualifying interest but only one of them is an employee or office holder. This is an area where owners of businesses and shares in companies where they are employed should take advice as early as possible rather than leaving it until a sale is imminent.
It is common to find married couples where one has a substantial income whilst the other has spare basic rates or even personal allowances. In those cases it makes no sense for the higher income spouse to have the income producing assets and so these could be transferred across, and particularly things like let property. There is a caveat here. In a case where one spouse had their own (possibly inherited) wealth prior to marriage and there was a pre-nuptial agreement in place, then transferring ownership to save tax could well blow a hole in the pre-nup.
The 60% tax band
An individual whose total taxable income exceeds £100,000 loses their personal allowance at the rate of £1 for every £2 of excess income. This means that the individual will pay an effective rate of tax of 60% on income between £100,000 and £114,950. A taxpayer with income between £100,000 and £114,950, and even slightly above, should consider reducing their taxable income below the £100,000 mark by means of a pension contribution or a Gift Aid donation to achieve an effective tax saving of 60%. Directors of a family company should take care over the timing of dividends so as not to bring shareholders into the 60% net.
Private residence relief
It is well known that a capital gain on an individual’s main residence attracts a special relief. However it is less well known that where there are two or more residences an election can be made to establish which is the main one for CGT purposes. This election must be made within strict deadlines but once in place it can be varied to ensure that both main residences qualify for relief for the last three years of ownership.
Share incentive plans
There is a range of reliefs for employees who are awarded shares in their employer company. Employees who get shares under a Share Incentive Plan and keep them in the Plan for five years will not pay Income Tax or National Insurance contributions on their value when they acquire them.
There are four different ways in which employees can receive shares under Share Incentive Plans, free shares worth up to £3,000 a year, partnership shares, matching shares and dividend shares.
IHT relief for regular gifts
There is a complete IHT exemption for regular gifts made out of after tax income provided the donor is left with sufficient income to maintain their normal lifestyle. So picture a typical case where mother and father want to send junior to private school but are struggling to make ends meet. However the grandparents are retired with a good pension. If grandparents can be persuaded to pay for the school fees that will remove a chunk of capital from their estates which otherwise would be liable to IHT on their death at 40%.
Tax relief on Gift Aid donations
Gift Aid is a valuable resource for charities. But individual donors who are liable to pay the 40% higher rate or 50% additional rate can obtain tax refunds. A gift of £800 would be grossed up to £1,000 in the hands of the charity. An individual liable to 40% income tax would then be entitled to a tax refund of £1,000 x 40% -20% = £200. The relief is claimed via the tax return for those in self assessment or by contacting HMRC. It is possible to ask for Gift Aid donations to be treated as being paid in the previous tax year but the request must be made within strict deadlines.
Anyone can invest up to £3,600pa into a pension scheme whether or not they have taxable income and obtain 20% tax relief. So assume father is a company director who is making maximum pension contributions, mother has no earnings and they have two children. Father could invest the net sums of £2,800pa each into pension plans for his wife and children and the pension plans will actually receive £3,600 each.
CGT annual exemptions
Both husband and wife have annual exemptions of £10,600 each for 2011/2012, and it may be possible to use both exemptions with some relatively simple planning. With a 28% CGT rate the annual exemption is now worth £2,968 (£5,936 for couples) and so it is not to be sneezed at.
Richard Mannion is national tax director at Smith & Williamson
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