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Tax Planning

Overview
Both individuals and companies are entitled to fully utilise a variety of allowances. The purpose of the following information is to highlight some of the more common allowances and some of the potential opportunities

All figures quoted are based on the 2006 / 2007 Tax Year

Individuals
The main taxes are: Income Tax, Capital Gains Tax and Inheritance Tax

Income Tax
The ‘standard’ personal allowance is currently £5,035 per annum; anybody with income (both earned income and income from savings) up to this amount is exempt from income tax. Children under the age of 18 are also entitled to the standard allowance. An individual is subject to 10% income tax on the first £2,150 of taxable income (this would be the amount on top of their personal allowance). Between £2,151 and £33,300 tax is charged at 22% for non-savings income (generally referred to as earned income).  The tax rate is 20% for savings income (generally referred to as unearned income).  Therefore a combination of tax rates can apply. Any taxable income in excess of £33,300 is subject to a flat rate of 40%; this applies to non-savings and savings income.  It is only the amount in excess of £33,300 that is subject to 40%

How to possibly mitigate income tax on savings
Let us assume that an individual has a total taxable non-savings income (a salary) of £33.300; if this individual has any savings it might be advisable to consider tax-free or taxed-privileged investments. Perhaps an Individual Savings Account (ISA) or National Savings products would be most suitable.

Where one spouse is subject to tax at 10% or 20% (or is not subject to income tax at all) and the other spouse is subject to a tax rate of 40%, it could be advisable to transfer savings to the spouse who is subject to a lower rate of income tax.

The above are just two simple ideas to consider; there are a lot more tax planning opportunities

Age allowance
Once someone reaches age 65 their personal allowance increases to £7,280; over age 75 it increases to £7,420. However, where an individual's total taxable income exceeds £20,100 the age allowance will reduce by £1 for every £2 of income over £20,100. Irrespective of the individual’s total taxable income, the personal allowance will not fall below the standard personal allowance. If someone aged 65 had a total taxable income of more than £25,135 they would lose all of their age allowance; this s known as the are-allowance ‘trap’

How to retain the age allowance
It might be appropriate to consider investments that are deemed not to generate 'taxable' income. Examples would include Individual Savings Accounts (ISA's) and Investment Bonds. Such investments could help retain some or all of the age allowance

Capital Gains Tax (CGT)
Basically as far as individuals are concerned the allowance is £8,800 each tax year.  However, it is not a cumulative allowance so if someone makes a gain of more than £8,800 in one year the previous ‘unused’ allowance is not carried forward. 

Allowable losses
The amount of any capital gains may be offset by any allowable capital losses arising in that tax year, or unused allowable losses brought forward from previous tax years (losses can be carried forward indefinitely).

Indexation relief
This applies to assets acquired before 1/4/98 and is therefore not available on assets acquired after this date. Where applicable, it has the effect of increasing the acquisition cost in line with inflation, thus reducing the amount of potential capital gains. For assets acquired after 6/4/98, indexation relief was replaced by taper relief – see below.  For disposals of assets acquired before 1/4/98, but not disposed of until after 5/4/98, indexation relief applies up to 5/4/98 and taper relief applies thereafter.

Taper relief
For disposals of assets after 5/4/1998, taper relief is available.  The effect of this is that the amount of capital gains on which CGT is levied is reduced by a percentage that varies according to the length of time (up to a maximum of 10 years) that an asset (i.e. UT/OEIC fund) is held. 

Husband & Wife transfers
Transfers of assets between a husband & wife living together are treated as neither a gain nor a loss to the spouse transferring it.  When sold at a later date by the recipient spouse the asset is treated as though it had always been owned and any indexation relief, allowable losses, taper relief and the recipient spouse’s annual exemption will apply.  The key benefit of transfers is to reduce CGT by using the recipient spouse’s annual exemption and potential lower marginal rate of tax.

Death
Under the current CGT regime, death is not classed as a disposal for CGT purposes.  In consequence, any capital gain between date of acquisition and date of death, ‘die’ with the asset owner and are effectively ‘written off’.  The asset then passes to the deceased’s estate and the estate is deemed to acquire the asset at the current market value at the date of death.

Inheritance Tax
This is a complex Tax; essentially Inheritance Tax (IHT) is levied where an individual’s estate (on death) exceeds £285,000 – this is known as the ‘nil rate band’.  The value of the estate above £285,000 is subject to a flat rate of tax at 40%.  There are a number of allowances that can help reduce the chargeable value

Main annual allowance
It is possible to gift £3,000 each tax year, so a married couple / registered civil partnership can gift £6,000 each tax year; such gifts are treated as allowable deductions from the value of a person’s estate. One previous year’s allowance can be carried forward as long as the current year’s allowance is also used at the same time

Gifts out of normal expenditure
Further amounts can also be gifted if it can be shown that such gifts are out of income and do not deprive an individual from their ‘usual’ standard of living.  This is a simplified explanation; there is more detail to consider

Smaller gifts
There are further amounts than be gifted.  If you want further information please ask

Potentially Exempt Transfers (PET’s)
Transfers of value (gifts) of any size can be made. However, the excess above any allowances will be deemed to still be part of a person’s estate for 7 years from the date of the gift.  This is a complex area and advice should be sought

Using Trusts
A variety of Trusts have and can still be used effectively (despite some recent press commentary) to help immediately reduce the value of a person’s estate for IHT purposes.  This is a very complex area of IHT and advice should be sought

National Insurance (NI)
Employees pay NI on earnings above £97.01 per week (up to £645 per week) at a rate of 11%.  A further 1% is payable on earnings above £645 per week.  Employers pay 12.8% on all earnings above £97.01 per week.

This is a separate ‘tax’ in addition to Income Tax.

The self-employed pay different rates of NI on similar bands of income as above.

There are ways to reduce NI payments for certain contracted-out pension arrangements.

Here’s an idea - Salary Exchange (for the employed)
It is possible to reduce NI payments by way of a Salary Exchange (often referred to as a salary sacrifice) arrangement. This is a method used to increase pension contributions. Salary Exchange does not mean you take home less pay; indeed you will be in exactly the same position with regard to your ‘take-home’ pay on the basis you pay a personal pension contribution. This is a very effective strategy for all individual’s who earn above £97.01 per week (£5,044 per annum) and it further benefits those who pay 40% Income Tax.

It does require the co-operation of your employer.  There may be some ‘pitfalls’ to be aware of; however, if the pitfalls are covered it remains a highly effective strategy

Limited companies
The main tax is Corporation Tax; it is charged on profits.  The smaller companies rate is 19% and the standard rate is 30%.  There are marginal rates of 23.75% and 32.75%, these rates fall in between the smaller companies rate and the standard rate. 

This is too complex a subject to deal with herein; if you run your own business you should seek advice about ways to reduce your tax liability

Sovereign Asset Management is a trading style of Sovereign Asset Management (Bristol) LLP, which is authorised & regulated by the Financial Services Authority; registration number 434895. Sovereign Asset Management (Bristol) LLP is registered in England & Wales, registration number OC313334. Any guidance contained within this website is subject to the UK regulatory regime; as such the content is for consumers only based in the UK. The FSA does not regulate all forms of Protection, Business Assurance or Tax Planning. Where this website offers links to any other websites, Sovereign Asset Management (Bristol) LLP have no control over the content and cannot be held responsible for the content or any material transmitted to your computer.