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Thu 17th Feb 2011

• Independent taxation: i.e. ensure assets/income are split (where possible) between married couples and civil partners (and other couples where appropriate) in the most tax effective way to enable maximum use of personal allowances and possibly to move income into a lower tax band (e.g. if one party pays tax at a lower rate than the other). Investments could be transferred to a spouse/civil partner on a no gain/no loss basis without triggering a CGT disposal (subject to practical considerations and ensuring such transfers are outright and unconditional). Older couples should ensure that assets/incomes are shared so as to maximise the availability of age allowances (in 2011/12 age allowance starts being lost once income exceeds £24,000 (£22,900 in 2010/11)).
• Bank/building society accounts: consider closing accounts before the tax year end in order to crystallize interest payments that would otherwise fall into 2011/12, where a tax advantage can be gained by such action.
• Employers could consider: paying salary/bonuses/dividends before 6th April 2011 to use up any unused personal allowances or basic rate band; and/or using one of the share option schemes available. Alternatively, the employer could consider postponing payments of bonuses/dividends etc until after 6th April 2011 if personal allowances and basic rate bands have already been used up – but bearing in mind the reduction in the basic rate band in 2011/12.
• Company owners: if a married couple, ensure salary/dividends are split as evenly as possible; consider bringing forward payment of salary/dividends before the tax year end.
• Self employed: consider changing the accounting year end to 31 March; delay expenses until after 5 April 2011; a sole trader could consider bringing his wife/civil partner into partnership in order to share salary/dividends.
• ISA’s: principal method of tax free investing with exemption from any personal income tax or CGT; ensure 2010/11 ISA allowance has been fully utilised (if appropriate) up to £10,200 (of which up to £5,100 can be in cash). From 6th April 2011 the ISA limit increases to £10,680 (of which £5,340 can be in cash). A cash ISA can be transferred to a stocks and shares ISA (but not vice versa). Eligible investors aged 16 or 17 can invest £5,100 into a cash ISA before 6th April 2011 and £5,340 in 2011/12.
• Single premium investment bonds (onshore and offshore): investment bonds can represent a useful tax planning tool. They are non income producing; the annual 5% cumulative allowance can enable tax to be deferred until a time when gains might be taxed at a lower level (or not at all); bonds (or segments) can be assigned to someone paying tax at a lower rate without causing an immediate chargeable event. Consideration should be given as to whether bond encashments planned for 2011/12 should be carried out before 6th April 2011 for anyone who will be affected by the reduction in the basic rate limit (but remember that partial encashments are treated as occurring on the last day of the policy year whereas full encashments occur on the actual day of encashment).
• Maximum Investment Plan: currently enjoying a new lease of life as a result of pensions tax relief restrictions, these may be suitable for higher/additional rate taxpayers looking to make regular savings over the longer term. Within the life fund, taxation is usually no higher than 20% overall and the policy proceeds after 10 years are generally tax free in the hands of the policyholder regardless of personal tax rate.
• Enterprise Investment Scheme: £500,000 investment per tax year with 20% tax relief (or such amount as would reduce the investor’s income tax bill to zero). Unlimited CGT deferral also potentially available as long as the investment is made within 3 years of the disposal. Remember that up to 5th April 2008 CGT could be as high as 40% (although taper relief has to be taken into consideration) and if reinvested into an EIS within the 3 year window (ie. pretty quickly and by 5th April 2011 at the latest) the revised rate due will be that applying when the EIS is eventually disposed of (based on current rates, a maximum of 28%).
• Venture Capital Trust: £200,000 investment per tax year with 30% tax relief (or such amount as would reduce the investor’s income tax bill to zero). Tax free dividends and no CGT.
• Personal allowance restriction/removal and 50% income tax rate: for further guidance and possible ways of bringing income below the £100,000 threshold and planning methods for avoiding the 50% rate, please refer to the article in the 22nd January 2010 issue of Round Up as most points remain valid (available on the website under News; then Round Up; then click page 7 at the foot). The ‘Using capital gains to supplement income’ section should now state that CGT is payable at either 18% or 28% depending whether gains in excess of the annual exempt amount fall into the basic or higher/additional rate bands respectively.                                                                                                           

National Insurance Contributions  

• All NI rates increase by 1% from 6th April 2011 but the impact of this will be lessened to some extent due to the fact that:

• If individuals have a choice of receiving income this tax year or next then, all other things being equal, it will make sense to receive them in this tax year in order to pay lower NI (employer’s NI would also be less).
• Affected individuals might consider salary sacrifice pension arrangements where appropriate  

• Consider realising gains (or losses to reduce gains to the level of the CGT annual exempt amount) before the tax year end in order to make use of the CGT annual exempt amount (AEA) - £10,100 per person this year, and a maximum of £5,050 for trustees – (The AEA for 2011/12 had not been confirmed at time of writing).
• Both husband and wife have their own CGT annual exempt amount so ensure assets are held in such a way as to maximise use of both allowances. Assets can be transferred between spouses on a no-gain no-loss basis in order to make use of both exemptions or to offset one spouse’s loss against the other’s gain (transfers must be outright and unconditional).
• Growth investments: if investments such as growth unit trusts/OEICs are used and shared where possible between both members of a married couple/civil partnership then tax free ‘income’ can effectively be received by withdrawing gains within the annual CGT allowance.
• The CGT allowance cannot be carried forward if unused in a tax year.
• Remember that the CGT rate altered from a flat 18% to the two rates of 18% and 28% from 23rd June 2010. Gains arising in 2010/11 before that date will be taxed at 18% and will not be taken into account in determining the tax rate applicable to gains after that date.
• As there was a CGT rate change part way through the year, if a person has had more than one gain in 2010/11, losses and the annual exempt amount can be deducted in the way that results in least tax being due, e.g. off-setting the annual exempt amount against a post-23rd June 2010 gain which would otherwise be subject to tax at 28% instead of the pre-23rd June 2010 gain subject to tax at 18%.
• If a substantial gain can be spread, consider realising some this tax year and next in order to make use of 2 sets of CGT allowances (or 4 if jointly owned with a spouse/civil partner).
• If a gain cannot be spread, consider deferring the disposal until the new tax year which will mean any CGT due will not be payable until 31 January 2013.
• Although bed and breakfasting no longer works, there are alternatives to consider such as:

• The IHT nil rate band (NRB) remains at £325,000 in 2011/12 (and is scheduled to stay at that level until the end of 2014/15). This can present opportunities in terms of continued IHT planning using a variety of methods including insurance-based solutions if there is a need to retain access to capital and/or income (discounted gift trusts, loan trusts etc) as appropriate.
• Make maximum use of IHT gifting (where appropriate) before the tax year end and in the new tax year. The £3,000 annual exemption can be carried forward one tax year if unused as long as the donor fully uses the current year’s exemption first. Regular gifts out of surplus income can be established, perhaps by way of payment of premiums into a regular savings vehicle in trust. The £250 small gifts exemption can be made to an unlimited number of different people as long as no other gifts are made to the same people in the same tax year. All these exempt gifts are immediately outside the donor’s estate for IHT purposes.
• Business assets qualifying for Business Property Relief (BPR) or Agricultural Property Relief (APR) could be gifted to a discretionary trust usually without an IHT liability arising which could be useful if, in future, BPR/APR is removed or reduced or, at a later date, the asset failed to qualify for BPR/APR.
• If outright gifts are unsuitable due to the CGT bill that would arise, consider transferring the asset into a discretionary trust which would normally enable holdover relief to be claimed in respect of the CGT as long as the settlor, spouse and minor unmarried children cannot benefit (and if within the IHT nil rate band, there would be no IHT implications either). Such planning must be carefully considered as it may be unsuitable if dealing with elderly or infirm clients where, on death, CGT would be eliminated.
• Gifting assets when their values are low can be advantageous although the CGT implications must be taken

Investing for Children  

• Although the Child Trust Fund (CTF) has effectively ended, it is still possible for payments to be made to existing CTF accounts up to £1,200 per tax year and continue to benefit from tax free growth.
• Alternative planning methods for accruing funds for children would include establishing a bare trust for the child’s benefit and investing in either growth collectives to use the child’s own CGT allowance, or an offshore single premium bond to offset chargeable gains against the child’s income tax personal allowance (NB - if the settlor is a parent and the child is a minor when chargeable event, gains over £100pa would be taxed on the parent).
• To retain more control a discretionary trust could be used, which may bring some income tax benefits as the first £1,000 pa of income falls within the trustees’ standard rate tax band and is taxed at basic rate (income above the band is taxed at 50%, or 42.5% for dividends). The trustees’ CGT AEA would be a maximum of £5,050 (in 2010/11 – the 2011/12 AEA has yet to be confirmed).
• Setting up and funding a pension for the child, although access to funds will not be until age 55 at the earliest as things currently stand (which could be classed as a good or bad thing!).
• All of the above would represent gifts for IHT purposes and, depending on their nature, could be covered by the annual £3,000 exemption, the £250 small gifts exemption or the regular gifts out of income exemption.

If you wish to discuss any of the issues raised within this article, please contact us.

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