Tax year end planning 2007

Year end tax planning

Tax is a subject that excites very few people. It is easy to ignore awkward issues involving tax, such as those mentioned in this newsletter. Don’t - it could cost you dear. It’s a good idea to review your tax affairs at least once a year and the period leading up to the end of the tax year on 5 April is the best time to do this. We summarise the more important year end tax tips to help you identify areas that should be considered. As always we would be delighted to discuss with you the issues involved and any appropriate action you may need to take.

For advice call Sarah Nickols in Coventry on 02476 554310 or Jan Hornby in our Solihull office on 0121 711 2468.

Tax saving tips for the family

Married couples
Marriage gives limited scope for income tax planning but spouses are taxed separately. Therefore, by careful planning, maximum use can be made of personal reliefs and the starting and basic rate tax bands. Given that the personal allowance cannot be transferred between spouses it may be necessary to consider gifts of assets (which must be outright and unconditional) to even up incomes. A transfer of just £1,000 of savings income from a higher rate taxpaying spouse to one with income below the personal allowance (currently £5,035) will save £400 a year.

The tax treatment of married couples applies to same-sex couples who have entered into a civil partnership under the Civil Partnership Act.

Income from jointly owned assets is generally shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset. The exception is dividend income from jointly owned shares in ‘close’ companies which is split according to the actual ownership of the shares. Close companies are broadly those owned by the directors or five or fewer people.

Tip
If you are self-employed, consider employing your spouse or taking them into partnership as a way of redistributing income. This could be just as relevant for a property investment business producing rental income as for a trade or profession.

Note
Care must be taken because HMRC may look at such situations to ensure they are commercially justified. If a spouse is employed, the level of remuneration must be justifiable and the wages actually paid to the spouse. The National Minimum Wage rules may also impact.

Those aged 65 and over
Taxpayers aged at least 65 should consider how to make full use of the available age allowances. The higher allowances are gradually withdrawn once income exceeds £20,100.

Tip
Consider switching to non-taxable or capital growth oriented investments to avoid losing out on allowances.

Children
Children have their own allowances and tax bands. Therefore it may be possible for tax savings to be achieved by the transfer of income producing assets to a child. Generally this is ineffective if the source of the asset is the parents and the child is under 18. In this case the income remains taxable on the parents unless the income arising amounts to no more than £100 gross per annum.

Tip
Consider transfers of assets from other relatives (eg grandparents) and/or earnings from the family business for teenage children to use personal allowances, starting and basic rate tax bands.

Remember that children also have their own capital gains tax (CGT) annual exemption (£8,800). It may be better for parents to invest for capital growth rather than income.

For children born since September 2002 a Child Trust Fund (CTF) has been introduced. The idea is to encourage tax-efficient savings by family and friends with the government’s help to build a nest egg which the child can access once he or she reaches age 18. The government’s initial contribution amounts to £250 (£500 for low income families) with further payments promised once the child reaches age seven. Other contributions of up to £1,200 per annum can be added to the fund and although there is no tax relief on making the contributions the fund is tax exempt.

Non-taxpayers

Children or any other person whose personal allowances exceed their income are not liable to tax. Where income has suffered tax deduction at source a repayment claim should be made. In the case of bank or building society interest, a declaration can be made by non-taxpayers to enable interest to be paid gross.

Remember that the 10% starting rate applies to all types of income so that if the only source of taxable income is bank or building society interest the first £2,150 (for 2006/07) is liable at only 10%. If 20% tax has been deducted at source a repayment may be due.

Tip
Tax credits on dividends are not repayable so non-taxpayers should ensure they have other sources of income to utilise their personal allowances.

Family companies

If the payment of bonuses to directors or dividends to shareholders is under consideration, give careful thought as to whether payment should be made before or after the end of the tax year. The date of payment will affect the date tax is due and possibly the rate at which it is payable.

Tip
Remember that any bonuses must be paid within nine months of the company’s year end to ensure tax relief for the company in that period.

Alternatively consider the payment of a pension contribution by the company on behalf of an employee since this is tax and national insurance free.

Investments - are yours tax efficient?

There is a wide range of investments with varying tax treatments. We take a look at some of the main ones that have special tax rules.

WARNING

When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the long and short term. An investment strategy based purely on saving tax is not advisable.

Individual Savings Accounts
Individual Savings Accounts (ISAs) provide an income tax and capital gains tax free form of investment. The maximum investment limits are set for tax years. Therefore to take advantage of the limits available for 2006/07 the investment(s) must be made by 5 April 2007. You can invest either in a maxi ISA or mini ISAs. The maxi ISA route gives you the option to invest up to £7,000 (per tax year) either fully in stocks and shares or up to £3,000 in cash with the balance in stocks and shares. Under the mini ISA route, up to £4,000 can be invested in stocks and shares and up to £3,000 in cash. 16 and 17 year olds are able to open (mini) cash ISAs.

Other investments
National Savings products are taxed in a variety of ways. Some, such as National Savings Certificates, are tax-free.

Single premium life assurance bonds and ‘roll up’ funds provide a useful means of deferring income into a subsequent period when it may be taxed at a lower rate.

The Enterprise Investment Scheme (EIS) allows income tax relief at 20% on new equity investment (in qualifying unquoted trading companies) of up to £400,000 per tax year.

Capital Gains Tax (CGT) exemption is given on shares held for at least three years.

Capital gains realised on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred where gains are reinvested in EIS shares.

A Venture Capital Trust (VCT) invests in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends (although the tax credits are not repayable) and on any capital gains arising from disposal of shares in the VCT. Income tax relief currently at 30% is available on subscriptions for VCT shares up to £200,000 per tax year so long as the shares are held for at least five years.

Second hand endowment policies (SHEPs) can be very attractive. Purchasing a SHEP will give an initial cost plus subsequent premiums payable to maturity. On maturity a capital gain arises less the purchase price and premiums paid. It may be possible for each member of a family to use their CGT annual exemption in this way.

Finally, review your borrowings. Full tax relief is given on funds borrowed for business purposes. Your mortgage does not qualify for any tax relief.

Capital gains tax

The availability of taper relief at 75% on business assets after just two years of ownership means that the effective rate of capital gains tax (CGT) for a higher rate taxpayer is often only 10%.

Annual exemption
The first £8,800 of gains made in 2006/07 are CGT-free being covered by the annual exemption. Note that husband and wife both have their own annual exemption, as indeed do children. A transfer of assets between spouses may enable them both to fully use this. Consider selling assets standing at a gain before the end of the tax year on 5 April to use the annual exemption. Bed and breakfasting (sale and repurchase) of shares is no longer effective but there are two variants which still work:

• sale by one spouse and repurchase by the other
• sale followed by repurchase via an ISA.

These techniques may also be used to establish a loss that can be set against gains. The timing of such disposals may be critical because losses are used against gains before applying taper relief.

Tip
On the other hand if a disposal is deferred until a date after 5 April 2007 then not only will next year’s annual exemption be available against that disposal but the tax payable will be due a whole year later. Additional taper relief may also be available.

Two homes?
If you have two homes then consider making an election so that future gains on your ‘main residence’ are exempt from CGT and any potential gain on your second property is minimised. Talk to us if this is relevant for you.

Other ideas
A capital gain can be deferred if the gain is reinvested in the shares of a qualifying unquoted trading company via the Enterprise Investment Scheme.

A capital loss can be claimed on an asset that is virtually worthless. Where the asset is of ‘negligible value’ by 5 April 2007 the capital loss can be used in 2006/07.

Moving abroad can take you outside the CGT net. However it is clearly not a decision to be taken lightly and requires very careful planning. Please talk to us if this is an area of interest for you.

No CGT planning should be undertaken in isolation. Other tax and non-tax factors may be relevant, particularly inheritance tax in relation to capital assets. Please talk to us soon if there are any issues in relation to CGT planning you wish to discuss.

Employers...the form-filling starts here

If you are an employer the end of the tax year marks the start of the form-filling season! Here’s a reminder of important deadlines for sending information (and money!) to HMRC.

19 April 2007 - Interest will run on any 2006/07 PAYE, NIC, student loan and CIS deductions not paid over by this date (22nd for electronic payments).

19 May 2007 - Employers’ year end returns (P35/P14/P38) due for submission.

31 May 2007 - Employees must be provided with their P60 (certificate of pay and tax deducted).

6 July 2007 - Submission of P11Ds and P9Ds which show details of expenses paid and benefits provided to employees and directors. There is a penalty for submission of late or incorrect returns. Employees must also be given a copy of their P9D/P11D by this date.

19 July 2007 - Class 1A NIC for 2006/07 on most benefits in kind provided to employees must be paid. Interest runs from this date on late payments.

19 October 2007 (22nd for electronic payments) - PAYE settlement agreement liabilities for 2006/07 are due, together with Class 1B NIC. Interest runs from this date on late payments.

Electronic filing and payment
All employers with at least 50 employees must file their 2006/07 end of year returns electronically. Employers with fewer than 50 employees do not have to start online filing until 2009/10 but there are tax-free incentives for early take up. Large employers (those with at least 250 employees) must also pay their PAYE electronically.

Talk to us if you are interested in using a PAYE settlement agreement to account for the tax due on minor employee benefits. It can reduce administrative hassle and SAVE TIME!

Our dedicated payroll bureau in Coventry can handle all of these requirements. Call Monima Das on 024 7655 4321.

Giving to charity

Charitable donations made under the Gift Aid scheme can result in significant benefits for both the donor and the charity. The charity is able to claim back tax at 22% on any donations and if the donor is a higher rate taxpayer the gift will qualify for 40% tax relief. Therefore a cash gift of £78 will generate a tax refund of £22 for the charity so that it ends up with £100. The donor will get higher rate tax relief of £18 so that the net cost of the gift is only £60.

Tip
Tax relief against 2006/07 income is possible for charitable donations made between 6 April 2007 and 31 January 2008 providing the payment is made before filing the 2006/07 tax return.

Always remember to keep a record of any gifts you make.

It is also possible to make gifts of quoted shares and securities or land and buildings to charities and claim income tax relief on the value of the gift. This may be tax efficient for larger charitable donations.

Pension contributions

There are many opportunities for pension planning but the rules can be complicated. Furthermore the rules on the taxation of pensions changed very significantly in April 2006. The new regime includes a single lifetime limit (initially set at £1.5 million) on the amount of pension saving that can benefit from tax relief as well as annual limits on the maximum level of pension contributions (initially set at £215,000).

Tax relief is available on pension contributions at the taxpayer’s marginal rate of tax. Therefore a higher rate taxpayer can pay £100 into a pension scheme at a cost of only £60. Indeed for some individuals, in particular where income consists largely of dividend income, the marginal rate of tax maybe as high as 44.5%. For such an individual the true cost of a £100 pension contribution is £55.50. With the inability of the state to provide adequate levels of retirement pensions widely acknowledged, it is more important than ever to provide for a secure old age.

All individuals, including children, can obtain tax relief on personal pension contributions (not retirement annuity premiums) of £3,600 (gross) annually without any reference to earnings. Higher amounts may be paid based on net relevant earnings (NRE).

Individuals can make pension contributions of up to 100% of their NRE in a tax year. One of the significant changes under the new regime is that contributions must be paid during the tax year. There is no facility to carry contributions back to the previous tax years.

Directors of family companies should, as an alternative, consider the advantages of setting up a company pension scheme or, alternatively, arranging for the company to make employer pension contribution. If a spouse is employed by the company consider including them in the scheme or arranging for the company to make contributions on their behalf. Even with modest salary levels, significant benefits can accrue.

For pensions advice for yourself or in relation to setting up a company scheme call Wendy on 02476 554333 to arrange a free appointment with a financial advisor.

National insurance matters

If a spouse is employed by the family business it is probably now worth paying earnings in 2006/07 of between £84 (the lower earnings limit) and £97 (the earnings threshold) per week. There will be no employees’ contributions due on the earnings but entitlement to a state retirement pension and certain other benefits is preserved. No employer contributions are payable if earnings do not exceed £97 per week in 2006/07. Note that the thresholds will be £87 and £100 per week respectively in 2007/08.

Tip
A PAYE scheme would be needed to establish the employee’s entitlement to benefits.
For the self-employed there is a requirement to pay a flat rate contribution (Class 2). If your profits are low you can apply for exemption. The limit for 2006/07 is £4,465. If contributions have been paid for 2006/07 and it subsequently turns out that earnings are below £4,465 a claim for repayment of contributions can be made. The deadline for this claim is 31 December 2007.

Tip
On the other hand it may be advisable to pay the contributions in any event in order to maintain a contributions record. The alternative voluntary Class 3 contributions are £5.45 a week higher.

Company cars and fuel

Company car benefits are calculated by reference to the CO2 emissions. The level of business mileage is not relevant. The greener (environmentally!) the car, the lower the charge.

Businesses purchasing ‘green’ cars with CO2 emissions not exceeding 120 gm/km can generally write off the full cost of the car in the year of purchase. If the car is for the proprietor of an unincorporated business the allowances will be restricted to take account of the proportion of private use.

Tip
Check your position to confirm that the company car is still a worthwhile benefit. It may be better to receive a tax-free mileage allowance that could be up to 40p per mile for business travel in your own vehicle.

Where private fuel is provided, the charge is also based on CO2 emissions. You should review the arrangements to ensure no unnecessary tax charge arises. If you have opted out of free fuel during the year, the charge will be proportionally reduced. However where you opted in during the year a full charge is applied.

For advice on tax and NI matters call Sarah Nickols in Coventry on 02476 554310 or Jan Hornby in our Solihull office on 0121 711 2468.

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