Time ticks for year-end tax planning

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TIME TICKS FOR YEAR-END TAX PLANNING (Winter 07/08)

With April 5 just a month away, there is still time to put through a number of last minute tax saving plans.

This article is written in general terms, and if you feel any of these ideas may be appropriate for your circumstances, please get in touch with your usual contact at Burgess Hodgson.

CAPITAL GAINS

The new flat rate of 18 per cent to be introduced on April 6 represents a major change in the structure of this tax. The expected flurry of activity to complete business sales before April 6 has abated somewhat with the Chancellor’s announcement of a new Entrepreneurs’ Relief, retaining the 10 per cent tax rate for gains of up to £1 million on sales of certain business assets. However, there are still a number of situations where action by 5 April would be beneficial:

• Sales of larger businesses producing gains of over £1 million: hopefully the sale process on such transactions will be well under way by now!

• Some smaller share reorganisations and minor business asset sales may still be best before April 5. These would leave the Entrepreneurs’ Relief available for future transactions or sales of second businesses and, with the use of annual exemptions, the overall tax rate may be better.

• If you have old gains that have been rolled over, then it may be worthwhile taking action to crystallise the tax at a lower rate.

• Old indexation allowances for assets held between 1982 and 1998 – it may be possible to preserve these by transferring assets between spouses or civil partners before April 5, although there

have been suggestions that this may be clarified further in the forthcoming Budget.

• Balancing gains and losses: as an example, if you have capital gains made early in the tax year and have a share portfolio which shows losses then it may be worth crystallising these losses before 5 April to offset against the capital gains.

• Use of annual exemptions: you should consider realising capital gains to utilise your annual exemptions of £9,200 per individual.

USE OF TAX BANDS AND ALLOWANCES

• If personal allowances or lower rate tax bands are not fully used, then consider taking income/dividends from family businesses, if available, to use these up.

• Transfer of assets between spouses/civil partners: where one is paying higher rate tax and the other is not, transferring assets to the spouse with the lower tax rate will reduce the future tax burden overall.

• Dividends from family companies to spouses/civil partners: the Chancellor announced major changes to the rules in his pre Budget Report, which are currently in the form of a consultation document but will be effective by April 6. This may be the last opportunity to vote substantial dividends to spouses or civil partners who are not fully involved in running a family business in order to use up their lower rate tax bands.

TAX EFFICIENT INVESTMENTS

• Investments in Individual Savings Accounts (ISA) can be made up to £7,000 per annum. Income and Capital Gains within the ISA are tax free. These are particularly attractive to higher rate tax payers.

• Pensions contributions – consider if any pension contributions will be appropriate before April 5, especially where you are paying higher rate tax.

• Investments in Enterprise Investment Schemes (EIS), Venture Capital Trust (VCT): these tend to be for the wealthier investor, but can be particularly useful where there is a large capital gain to defer. For more information on EIS’s, see our Summer 2007 Bulletin.

INHERITANCE TAX

• Consider the use of annual exemptions of £3,000 per donor for gifts prior to April 5. To be effective, a cheque must be cleared within the tax year.

• If you have not used your exemptions for the previous year, this can also be used, making an exemption of £6,000 per donor.

NON DOMICILED INDIVIDUALS

• Major changes were announced in the pre Budget Report with these individuals being charged tax from April 6 on their world wide income rather than on a remittance basis unless a flat rate tax charge of £30,000 per annum is paid.

• Consider whether income or gains offshore should be crystallised before April 5 – by closing bank accounts/selling assets etc – provided it is not intended to remit this income/gain to the UK. Care must be taken if you have already remitted funds to the UK: always consult us before taking any action.

• Consideration will have to be given on local tax implications, but these can be especially useful in some countries which have special tax treatments for non residents or indeed where certain types of income/gain are not taxed - New Zealand for example has no Capital Gains Tax.

NON RESIDENT INDIVIDUALS

• Non resident individuals (whether UK domiciled or not) need to consider whether they can spend any more time in the UK before April 5 without exceeding the 91 days average. The position will become more difficult from April 6, with days of arrival and departure being counted.