Spring into action

It’s time to review clients’ tax affairs again. The adviser’s ‘new year’ offers plenty of food for thought from pensions to capital gains tax and inheritance tax.
 

 

Personal tax and finance

Child benefit

The new restrictions to child benefit where either partner has income in excess of £50,000 are now in force. Benefit is completely lost where one partner has income in excess of £60,000. Actions should be planned now to avoid or minimise the clawback of benefit, for instance by transferring income-producing assets, or making pension contributions. Capital gains tax will need to be considered if assets are transferred.

For this purpose, two people are ‘partners’ if:

• they are married or in a civil partnership and are neither separated under a court order nor separated in circumstances in which the separation is likely to be permanent; or

• they are not married to each other or in a civil partnership but are living together as husband and wife or as if they were civil partners.

?For many this will bring a need to prepare an income tax return for the first time to establish how much benefit needs to be withdrawn.

Allowances and lower income tax rates

The personal income tax allowance is reduced by £1 for every £2 where adjusted net income exceeds £100,000 and the fact that the additional higher rate of 45 per cent post-5 April 2013 (2012/13 year: 50 per cent) applies where income is in excess of £150,000. It is therefore even more important than ever that income is tax efficiently spread, for example through the transfer or shared ownership of assets.

Be aware that if total income falls between £100,000 and £118,880 in the tax year beginning 6 April 2013, the income tax rate on the income within that band is 60 per cent.

There are a number of ways action can be taken now to ensure that tax is minimised during the coming tax year. For the 2012/13 tax year, see below under ‘pension planning and charitable giving’.

Restriction on income tax reliefs

Prompted by a drive to counter tax anti-avoidance, certain tax reliefs will be limited to the higher of £50,000 and ?25 per cent of total income. Reliefs affected include:

• unincorporated trading loss relief ?for businesses with a year-end after ?5 April 2013;

• certain qualifying loan interest ?paid personally.

?It might be possible to avoid this restriction, or reduce its effect, by some relatively simple restructuring.

Capital gains

The top rate of capital gains tax of 28 per cent payable by an individual higher rate taxpayer means it is important to make the most of losses and annual exemptions (2012/13 year: £10,600 per individual), by ensuring that gains are made by the right person, and by planning to make the most of reliefs such as entrepreneurs’ relief, gift relief and rollover relief.

While ‘bed and breakfasting’ is no longer available, it is still possible to ‘bed and spouse’ where one spouse sells and the spouse buys back the shares.

Tax-efficient investing

• Venture capital trusts offer income tax relief at up to 30 per cent on an investment up to £200,000.

• Enterprise investment scheme investments attract 30 per cent income tax relief up to £1,000,000 and allow the deferral of capital gains made within the three years before the investment, or within the 12 months after the investment. Relief can be claimed wholly/partly in the preceding year.

• Seed enterprise investment schemes (SEIS) attract 50 per cent income tax relief up to £100,000 and 2012/13 capital gains reinvested through SEIS are exempt from tax so long as the subscription takes place before ?6 April 2014 and income tax relief is claimed in 2012/13 (via carry back ?if necessary). Relief for SEIS investments cannot be carried back from 2012/13 to 2011/12.

• Single premium investment bonds can be a tax-efficient way to invest, as they allow a tax-free return of capital, which can be used as an income. While there may not necessarily ?be a long term income tax saving, they can at least provide an income tax deferral. ?If, however, the profit can be taken from the investment when tax is payable at a lower tax rate than now, then there is an absolute tax saving. It is important that tax advice is taken covering the whole life of the bond so that potential back-end income tax charges are factored into the planning.

• Individual savings accounts (ISAs) remain a key method of investing in an income tax and capital gains tax efficient way. The investment can be in cash and/or stocks and shares. The limits for 2012/13 are £5,640 for a cash ISA and £11,280 for a stocks and shares ISA, of which up to £5,640 can be held in cash.

Inheritance tax

An unused annual exemption (2012/13 year: £3,000) can only be carried forward for one year. Therefore, on 6 April 2013, the 2011/12 exemption may be lost, unless a gift is made before that date.

Other inheritance tax (IHT) opportunities are not tax-year specific, but their timing can be crucial. These include:

• using the IHT nil rate band of £325,000 as many times as possible during lifetime

• gifts out of income that are surplus to needs as these have no limit and there is no need to survive seven years

• potentially exempt transfers, which are IHT-free after seven years

• ensuring that agricultural and business property reliefs are secured and preserved. If businesses change activity or ownership, or the use or ownership of assets changes, these reliefs can easily be lost. By the same token, sensible planning can often ?be undertaken to ensure that the reliefs apply;

• the use of trusts to shelter assets from both IHT and future claims, including the use of lifetime pilot trusts.

There are also a number of investment arrangements available that can assist in reducing IHT, which, in the right circumstances, can form a valuable part of an IHT planning strategy.

Pension planning

As well as being a tax-efficient way of securing an income in retirement, pension contributions are useful in ensuring that certain tax thresholds are not breached, that is £50,000/£60,000 for child benefit, £100,000 for personal allowances and £150,000 for the additional higher rate.

If the impact of these tax thresholds is to be avoided for the tax year 2012/13, the pension premium must be paid before 6 April 2013. The maximum gross contribution to pension funds (including any employer contribution) is restricted to £50,000 although any unused relief from the previous three years can also be used to increase this amount. With careful planning, it might be possible to increase the amount payable before 6 April 2013 even further.

For many, there is also an attraction to helping children and grandchildren by establishing a pension scheme for them, so that the fund has the maximum time to grow. Under the stakeholder pension provisions, up to £2,880 can be invested per year per child with basic rate income tax relief, so that the gross invested is £3,600. This is also very IHT-efficient ?if it is done out of surplus income (see IHT section).

There will be more amends to pensions. With effect from 6 April 2014, the following changes are expected:

• The annual contribution limit is being reduced from £50,000 to £40,000 so those in a position to do so should seek to maximise reliefs ahead of that change.

• The lifetime pension relief allowance will fall from £1.5m to £1.25m.

These are major changes affecting long-term strategic planning ?especially for those looking to ?boost savings in retirement.

Charitable giving

Higher rate relief will be given on cash donations made under the gift aid scheme. In addition, donations made between 6 April 2013 and submission of the 2013 tax return can be elected to be carried back to 2012/2013.

Full income tax relief is also available against the market value of listed shares and land gifted to charities.

Trusts

Trusts pay tax in their own right. In the case of discretionary trusts, it is the top rate of income tax, that is 50 per cent falling to 45 per cent from 6 April 2013, which applies. Consider distributing trust income to or for the benefit of discretionary beneficiaries to enable some or all of that income tax to be reclaimed in the light of the beneficiaries’ personal income tax status.

Other matters

It is important to review things regularly from a wider perspective, for example:

• Maintaining entitlement to capital gains tax entrepreneurs’ relief to reduce the liability on a business disposal. Conditions must be met for a full 12 months up to the disposal.

• New rules to determine tax residence come into force on ?6 April 2013 to clarify whether or not an individual is resident in the UK for tax purposes. Inevitably, there will be winners and losers and advice should be sought by all those seeking to maintain non-residence or become non-resident (see 'Read the small print').
  
   

 

Stephen Barratt is a director in the private client team at James Cowper