As we approach the end of the tax year on 5th April it is time to think about some of the simple “tax avoidance schemes” that are available to us all. Very often we can make a big difference to our tax bills by taking a few simple steps.
Capital Gains Tax
Capital gains of £10,900 are tax free during 2013-14. That is per person which means that married couples and civil partners can make total gains of £21,800 before paying any tax. And transfers between married couples and civil partners are ignored for CGT purposes.
If you have made a large Capital Gain during the year, and are sitting on a potential loss making asset, then you should consider realising that loss so that it can be used to reduce your taxable gain. You must, however, always consider any other costs involved.
Similarly, if you are sitting on gains on shares that are within the annual exemption then you could “bed and spouse” or “bed and ISA” that asset. This means that you sell the shares which are then bought by your spouse/civil partner or an ISA, thus avoiding the “Bed and Breakfasting” rules.
Individual Savings Plans (ISA’s)
This year each individual can invest up to £11,520 into an ISA. Of this, up to £5,760 can be invested in a “Cash ISA”, the balance of the investment being into a “Stocks and Shares ISA”. Whilst there is no tax relief on the actual investment, unlike contributions into a pension scheme, and income of capital gain made within the ISA is tax free. Again, these limits are doubled for married couples and civil partnerships.
Pension Contributions
Contributing into a Personal Pension attracts immediate tax relief. The amount that can attract tax relief is the higher of £3,600 or your total income subject to an annual limit of £50,000. Basic Rate taxpayers receive immediate tax relief at source, ie they will pay exactly the same amount of tax but instead will receive an investment of £100 in exchange for a payment of only £80 so the tax relief is, to an extent, “hidden”. Higher Rate taxpayers will receive the additional tax relief by means of a reduction in their tax bill.
This could be very useful for people earning just above £100,000. Personal allowances are reduced by £1 for every £2 by which income exceeds £100,000. Pension contributions are a valid deduction in calculating income. For instance, if you are earning £110,000 then by paying £8,000 into a pension will not only give you an investment of £10,000 but also reduce your tax bill by about £4,000!
Personal Allowances
The basic personal allowance is currently £9,440 and income of up to this amount is free of tax.
Partners within a marriage or civil partnership can transfer assets between themselves to ensure that income is split between them in the most tax advantageous manner. For instance, they could transfer savings accounts, shares and property between themselves to ensure that interest dividends and rental income is received by the partner paying tax at the lower marginal rate.
Always remember that income from joint property is taxed as if it is received equally by the joint owners. If the equitable ownership is not equal then the owners can jointly elect that the income is taxed in proportion to the actual ownership.
However, this is not the same as saying that the owners can elect for the income to be split in any proportion that they may decide. The election must be in writing on the Form 17, and must be accompanied by evidence of the ownership.
If you hold shares in a family business then you may be able to ensure that income is received in the most tax advantageous tax year, for instance by delaying or accelerating the payment of a dividend from a family company.
There may be costs involved in pursuing the above strategies, and these must always be considered in deciding upon a course of action. Please contact us if you need any further advice.