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Are there any tax breaks left?
You don’t have to bite the bullet and cough up
 Over recent years we have had many talks and meetings with clients who feel that there doesn't seem to be any way left for them to reduce tax. We are often asked, ‘Do I just have to bite the bullet and cough up?’
Every individual’s personal tax and financial position is different, so to provide a sweeping answer is impossible. However, there are still tax strategies that, with some careful planning, can ease the burden. Take a look at some areas that could be relevant to you.
Be sure to make the most of your allowances
Everyone under 65 has an annual personal allowance of £4,895 in 2005/06. Income up to your personal allowance is free of tax. It is particularly important for non-working spouses and children to use these allowances. The starting band is the first £2,090 of income over and above your personal allowance and on this you are taxed at just 10 per cent.
It could be worth moving income-producing assets within your family, so that the family as a whole reaps the benefit of all the available allowances.
Using annual exemptions
You can use your children's annual exemptions as well as your wife's or husband's. For example, if you move assets to your children by means of a ‘bare trust’, any gains belong to the child, who can then use his or her annual capital gains tax (CGT) exemption and thereby avoid paying CGT on the first £8,500 (for this tax year) of any gain.
Alternative schemes
We do not have enough space to go through all the tax planning strategies available, but here are some examples that you may wish to discuss further with us.
- Company directors may wish to consider using the so-called ‘lend-a-bonus’ scheme. This means taking a bonus, then lending it back to the company. Commercial rates of interest can be charged on the loan and, since National Insurance contributions are not payable on interest, directors could gain a NIC-free fund of income from the company.
- Although there has been a clamp down on many schemes used to reduce inheritance tax (IHT), there are still legitimate ways of reducing how much tax your heirs will pay when you die. Nil-rate band discretionary will trusts using an IOU, for example, could be one option. This means writing a debt clause into the Will, which settles a debt owed by the surviving spouse into a trust. It is a way of avoiding IHT while allowing the surviving spouse to use the assets, and could save up to £110,000 of IHT.
- There are some investments that have genuine tax breaks attached, and others that may be tax-efficient for you to include in your portfolio. The no-brainers are to make use of your Individual Savings Account (ISA) allowance where you can shelter up to £7,000 annually, but you may also wish to consider other tax-efficient methods such as National Savings Certificates.
- From April, Child Trust Funds will allow parents and others to top up these funds by £1,200 a year. The income from these will be free of income tax for both the child and the parents, but the funds must not be touched until the child reaches age 18.
And don't forget your pension. In effect, for a net cost of £1 to you, the government's contribution (in the form of income tax relief) means your fund receives £1.66, assuming you pay tax at 40 per cent. There are also savings on National Insurance where money is being paid into a company pension.
Feeling really adventurous?
- Have you ever thought about buying a forest? There are tax advantages to buying woodland. Income from commercially managed forests is exempt from income tax, and CGT is only paid on profit from the sale of the bare land. If the asset is owned for more than two years, the value of the forest will qualify for 100 per cent business property relief from IHT.
- How about Enterprise Investment Schemes (EIS) shares? If you've got some capital gains from other investments hanging around, this CGT gain can be deferred if you invest in Enterprise Investment Schemes shares. You can get 20 per cent income tax relief on investments up to £200,000 in each tax year if, broadly, you own no more than 30 per cent of the company. If you qualify for income tax relief, your EIS shares will also be exempt from CGT on sale after three years (although any deferred gain comes into charge on sale).
- And then there are Venture Capital Trusts (VCTs), which offer generous tax breaks. Investors who subscribe up to £200,000 for shares in a VCT and retain ownership for three years could receive 40 per cent income tax relief on the initial investment (up to April 2006, when the rate of relief will revert to 20 per cent). You also get exemption from income tax on dividends and exemption from CGT on disposal of the VCT shares themselves.
Investments in Woodland, Enterprise Investment Schemes and Venture Capital Trusts carry significant risks to capital and are therefore considered suitable for more sophisticated investors. You should therefore seek professional advice before proceeding
If you require any further information about the services that we provide or would like to review your financial planning position, please
contact us
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