Start of tax year planning checklist

Now that we’ve passed the 5th April deadline, it is time to consider what we didn’t do in the 2007/2008 tax year and what tax planning ideas and opportunities are available for 2008/2009
 
There’s quite often a rush at the end of the tax year to make sure you’ve maximised on all the tax savings you can. I’m writing this on 4th April 2008 and we’ve submitted several ISA and pension applications this week for clients just getting their cheques in by the end of the tax year. However, you’ve actually got 52 weeks before then to arrange your finances. Some of the following ideas could save you a considerable amount of money.
 
Investments
Make sure you make the most of tax allowances every year. Invest in tax-exempt investments – such as ISAs (max investment £7,200) and friendly society plans, such as Dentists Provident.
If you’ve used up your ISA allowance you can invest additional capital in unit trusts where the dividend or yield is 0%. If there’s no dividend income there’s no income tax payable. The only tax you then need to worry about is capital gains tax CGT (see below for ways to minimise that tax).
Consider investing in Enterprise Investment Schemes & Venture Capital Trusts to reduce your income tax liability by 20% and 30% respectively of the amount invested (max investment allowable for this purpose £500,000 EIS (subject to State aid approval); £200,000 VCT), but ensure that the investment is suitable to your attitude to risk.
Spread income-producing assets, such as savings or investment property between spouses to ensure lower and basic rate income tax bands are utilised.
 
Gifts for children
It is possible to make use of children’s and grandchildren’s income tax personal allowances by establishing suitable trusts to hold investments. In particular, provided the donor is happy that the child/grandchild will be absolutely entitled, a bare trust could be considered.
Remember, however that where a parent creates a trust for a minor unmarried child, under which that child is entitled to the income, and the income exceeds £100 gross in a tax year, it will be assessed on the parent, regardless of whether it is distributed or accumulated.
The Capital Gains Tax upside of a bare trust is the ability to offset the child’s annual CGT exemption against capital gains.
 
An alternative would be a discretionary trust which gives more control overthe assets gifted and secures an income tax benefit.
 
Income Tax
Make use of your personal allowance of £5,434.00. For example consider employing a spouse in the practice to maximise unused allowances – a bonus could also be paid to use a spouse’s personal allowance. Note, however, that salary should be justifiable and paid. Also consider distributing income to minors from a non-parental (to avoid above £100 rule) discretionary settlement.
If you’re over 65 you will start to lose your additional age related personal allowance if your income goes over £21,800, so plan your investments and pension withdrawals carefully.
 
Pension planning
For this tax year you can contribute the higher of £3,600 or your total UK earnings, subject to a limit set at £235,000 per annum. However watch out you don’t exceed the lifetime allowance (LTA) of £1.65m – this is the total amount that can be accumulated within all your pensions. To calculate your LTA multiply your NHS retirement income by 23 and add any private income. So if you’re expecting an NHS pension income of £40,000 a year and you have private pension assets of over £700,000 you will need to take action.
For those who need to increase their NHS pension, provided you are still a member of the NHS pension scheme you can buy added years by simply contacting NHS Pensions at Hesketh House.
Those with private or NHS income can make contributions to a personal pension plan. For a higher rate taxpayer this will reduce your effective income tax liability by 40% of the contribution made.
You can also consider making a pension contribution on behalf of a spouse or child who is not working and claim a further £720 (20% of £3,600).
 
Capital Gains Tax (CGT)
From April 6 this year Capital Gains Tax will be set at a flat rate of 18% and a new entrepreneurs relief will be introduced which charges tax at an effective rate of 10% on certain business gains up to a cumulative lifetime limit of £1m. Buy to let properties however have specifically been excluded from this relief.
You can crystallise gains to the extent of the annual allowance which is £9,600 for 2008/2009, but remember you must not reacquire the same shares or assets within 30 days.
For any gains made in this tax year the CGT will be payable on 31 January 2010, so if you can wait until 6 April 2009 to sell your investment the tax would not be payable until 2011.
Another often used method to reduce CGT is to transfer assets between spouses before sale to utilise both annual allowances.
Reinvestment relief is also available where the chargeable gain is deferred when the gain is re-invested in the new unified Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT).
 
Estate Planning
It is important to review your will and update if necessary. Many people think that their spouse is automatically entitled to any assets that are not held jointly. The reality is that, if you have children, your spouse is only entitled to the first £125,000 and an interest in half the remainder. In addition, if you have married or divorced since having your will drafted, your original will is no longer valid.
 
One of the simplest methods of inheritance tax planning is to make full use of each years annual exemptions such as:
·         Annual exemption - £3,000 (you can also use £3,000 for 2007/08 if not already used)
·         Small gifts exemption – max £250 per donee (person receiving the gift) per tax year
·         Gifts out of normal expenditure - for example, premium payments to a life insurance policy under trust will often be a simple economic and acceptable way of providing cash on death that is free of Inheritance Taxation (IHT) and using the annual and normal expenditure out if income exemptions
You could also consider a “deed of variation” where an inheritance has been received in last two years to make the distribution of the inheritance more tax efficient.
Consider gifting assets into trust, or directly to individuals, to take advantage of the current Potentially Exempt Transfer (PET) regime and nil rate band.
 
Charity Gifts
Gifts to UK registered charities are deemed to be paid net of basic rate tax, provided that the giver can certify that they are a tax payer. The charity can then gross up the net gift by the 22% (although the basic rate of tax has now fallen to 20% the Chancellor has put in place a transitional rate which applies to Gift Aid claims for the next 3 years). For the giver, additional tax relief is given at the rate of 18% on that part of the gross gift which falls into taxable income which is subject to tax at the higher rate.
 
This article simply provides some general planning ideas & touches on a number of areas that may be of interest. However, consideration should always be given to your overall financial position before making any decisions. For more in depth information on any of the above areas, please contact us on 0121 685 5060.