Monday, 11 March 2013

Year end tax planning

The current tax year ends on 5th April so now is a good time to plan to ensure the best use of individual’s allowances, exemptions and reliefs.  In difficult economic times, we all wish to minimise the contribution to the Chancellor of the Exchequer, which would otherwise be taken by way of direct or indirect taxes both immediately and in the future:

Income Tax

The number of people facing higher rate tax is increasing as tax thresholds reduce, leaving more people worse off, so either directing income from one spouse to another by transferring income producing assets, especially where one spouse pays tax at a lower rate could be advantageous, or investing funds in a non-taxable environment, for example an Individual Savings Account, might be opportune.

Capital Gains Tax

Individuals are each currently entitled to an annual exemption and now that Capital Gains Tax is again linked to income tax thresholds, a capital gains rate of 28% and 18% applies to chargeable gains falling in to higher rate and basic rate thresholds respectively and therefore, planning to minimise exposure is essential, especially as unused annual exemptions cannot be carried forward to a new tax year.
Spouses who live together could consider transferring assets on a ‘no gain/no loss’ basis and provided such arrangements are made on ‘an arms length basis’, it might be possible to use both, rather than one annual exemption on subsequent disposals making best use of both spouses exemptions and thresholds.
Where chargeable Gains arise, the timing and use of Capital Losses and, the possibility of spreading disposals over two tax years, in order to maximise use of current and future exemptions and postpone any liability due, could also be contemplated.

Inheritance Tax

This is a tax on Estate value and to maximise the transfer of wealth to the next generations, the main exemptions, listed below, can be considered:-

  1. Most transfers between spouses.
  2. The first £3,000 of lifetime transfers in any tax year, plus any unused balance from the previous tax year.
  3. Gifts of up to, but not exceeding, £250 per tax year to any number of persons.
  4. Gifts made out of income that form part of normal expenditure and do not reduce the donees standard of living.
  5. Gifts in consideration of marriage of up to either £5,000 per parent, £2,500 per Grandparent, or £1,000 by any other person.
  6. Gifts to Charities.

The use of gifts to a Discretionary Trusts might also be considered but the tax consequences, where the subject of the gift could trigger a Capital Gain, must be carefully considered.

In all matters relating to tax planning, individuals must take appropriate professional advice.

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