March 2011 - Crowe Horwath International

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Crowe Clark Whitehill £22,480 - income tax to be saved each year through efficient use of rate bands Pensions Pension Schemes remain an important means of tax-efficient saving for retirement, but the benefits have been restricted by a number of complex changes to the higher-rate tax relief available, with further changes taking effect from 6 April 2011. In brief, if you have total income in excess of £130,000 for any of the years 2007/08, 2008/09, 2009/10 or the current tax year, ‘anti-forestalling’ provisions introduced on 22 April 2009 will apply and tax relief may be restricted on any pension payments made by you or your employer in excess of £20,000. This limit is extended in circumstances where there was a prior history of contributions being made before 22 April 2009, dependent on both the amount and the frequency of those contributions. The rules change again from 6 April 2011. From that date, higher-rate tax relief will be available for everyone on contributions up to £50,000 each tax year with the ability to carry forward unused allowances for up to three tax years. Importantly, this new carry-forward provision is deemed to have been in place for 2008/09, 2009/10 and 2010/11. It may therefore be better to wait until after 5 April 2011 before making a large pension contribution. Additionally, with effect from 13 October 2010, the annual allowance for pension contributions is reduced from £245,000 to £50,000. This allowance applies for Pension Input Periods rather than tax years and where these two do not coincide, there is a risk that the annual allowance can be exceeded for contributions made since 13 October 2010, triggering an income tax liability. Please contact us if you require further advice on this extremely complex issue. Please note that all references to spouses also include members of Civil Partnerships Income tax Ensuring that all allowances and tax bands available to you (and your spouse if appropriate) are used as effectively as possible is a good starting point when considering income tax planning. You should therefore consider transferring income producing assets between spouses to gain maximum advantage. 2010/11 2011/12 Personal allowance £6,475 £7,475 Age allowance (65 to 74 years old) £9,490 £9,940 Age allowance (75 years old and over) £9,640 £10,090 Income limit for age allowance £22,900 £24,000 Income limit for full personal allowance £100,000 £100,000 Basic rate band (20%) £0 – £37,400 £0 – £35,000 Higher rate band (40%) £37,401 – £150,000 £35,001 – £150,000 Additional rate band (50%) Over £150,000 Over £150,000 Charitable donations under Gift Aid or, in some cases, pension contributions can be made to reduce taxable income. It is worth noting that a child is entitled to the personal allowance, even in the year of birth. Where a grandparent provides the funds (e.g. cash deposits) which give rise to taxable income, the child’s personal allowance is available to set-off against the income. However, where a parent puts funds aside for their child, any income arising from those funds will be taxed on the parent unless that income is less than £100 per tax year. Tax-efficient investments The Individual Savings Account (ISA) is possibly the best-known form of tax-efficient investment ‘wrapper’. Although no tax relief is available on the initial investment, no additional tax is paid on income or capital gains arising within the ISA itself, irrespective of the length of time the ISA is held. In the current (2010/11) tax year, up to £10,200 can be invested in a ‘stocks and shares’ ISA and £5,100 for cash-only. Your ISA allowance cannot be carried forward to the next year, so use it or lose it! Investments into Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are increasingly popular. Limits are as follows: Income tax relief Many tax allowances and reliefs are available on a ‘use it or lose it’ basis - hence the need to review one’s tax affairs before the end of the tax year. Limit for income tax relief Minimum hold period Other tax benefits VCT 30% £200,000 5 years Tax free dividends EIS 20% £500,000 3 years CGT exempt on sale EIS investment also allows a deferral of capital gains realised in the period three years before to one year following the date of the acquisition of the EIS shares. Any such gains to the value of the sum subscribed fall back into charge on the disposal of the EIS shares. Insurance bonds have become an attractive means by which income tax liabilities can be managed or deferred. The main attraction is the ability to take a tax deferred withdrawal of up to 5% a year of the original capital on a cumulative basis (until the original capital has been exhausted). This provides opportunities to plan further withdrawals which would be subject to tax in a time which best suits you and when applicable tax rates are lower.
Private Clients Newsletter March 2011 Use of IHT exemptions can save £2,400 each year, every year Gifts to Charity Charitable donations made under Gift Aid can assist in reducing taxable income levels if your income is above £100,000, thereby avoiding the withdrawal of the tax-free personal allowance and also avoiding the restrictions on tax relief for pension contributions if your income is above £130,000. Capital Gains Tax (CGT) Cash donations can be made after 5 April 2011 (but before you submit your 2010/11 Tax Return) and ’carried back’ to 2010/11, provided that your Tax Return is filed by 31 January 2012. Tax relief is also available on the gift of quoted investments and of UK land and property to charity. There is, however, no equivalent ‘carry back’ provision – to be relieved in 2010/11, the gift must be completed by 5 April 2011. Inheritance Tax (IHT) The annual exemption for gifts by any one donor has been £3,000 for many years now. Consider making use of the 2010/11 annual exemption, together with that for last year if not already used. Remember each spouse has his or her own £3,000 annual exemption. Use of these exemptions can mean an IHT saving of £2,400 each year, every year. Small gifts of £250 to any one donee are also exempt. An IHT exemption that is often overlooked is that for normal gifts out of income. Such gifts will qualify if they are made as part of the normal (i.e. typical or habitual) expenditure of the donor out of his income, and that after the gifts the donor is left with sufficient income to maintain his usual standard of living. For more details of this exemption please contact us. For 2010/11 gains of £10,100 are exempt from CGT. This annual exempt amount cannot be carried forward and is lost if unused in the year. Ignoring entrepreneurs’ relief (see below), two rates of CGT apply to gains realised from 23 June 2010. Capital gains are treated as the top slice of income, and those which fall within the basic rate band (£37,400) are taxed at 18%, with any excess liable at 28%. Gains realised prior to 23 June 2010 are not taken into account in determining whether the 18% or 28% CGT rate will apply. In this year of two rates of CGT, HM Revenue & Customs (HMRC) will allow individuals to set losses against those gains taxable at the highest rate of tax. It may be worthwhile selling assets to realise a loss. The transfer of an asset between spouses who are living together is tax neutral. Consider taking advantage of this to use a spouse’s unused annual exempt amount and/or basic rate band or to realise a loss. Entrepreneurs’ relief is available on the disposal of business assets, where CGT is charged on gains of up to £5 million at only 10%. There are complex qualifying conditions for business assets and these should be kept under constant review as the conditions must be met throughout the 12 months before sale. Deferring selling an asset until after 5 April 2011 will allow the use of next year’s annual exempt amount, and will defer the due date of payment of the CGT liability by one year to 31 January 2013. Alternatively, consider selling part of an asset in the current year and part after 5 April 2011 to take advantage of the annual exempt amounts and basic rate bands available in both years. The key date for CGT purposes is the date of the contract to dispose of the asset in question. To use this year’s annual exemption, consider selling an asset and having that same asset reacquired by your ISA, pension scheme or your spouse. Selling and reacquiring the same asset within the same 30 day period does not realise a gain. General anti-avoidance legislation means that care should be taken when using alternative strategies to bed and breakfasting to create losses, and we recommend you take further advice from us before doing so. Capital losses arising in 2010/11 on the disposal of shares acquired by subscription in unquoted (or AIM listed) trading companies may be offset against taxable income in the year giving tax relief at up to 50%.
Page 1: March 2011 Issue 01 News from Priva

March 2011 - Crowe Horwath International

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