Capital Gains Tax (CGT)

Changes surrounding CGT were introduced in June 2010. Higher rate taxpayers pay a top rate of 28% on capital gains, whereas basic rate taxpayers pay 18%, providing the gain does not push them into the higher rate tax threshold. Prior to making any disposals, consider taking advice on the CGT position as some basic planning may reduce the potential tax liability.

Our tips:

• Utilise your annual CGT exemption: You can make capital gains of up to £10,100 in the current tax year with no tax liability. Utilising this exemption could create tax savings of up to £5,656 for a married couple.

• Consider making claims for capital losses. If assets have become worthless or of negligible value, their sale could trigger losses which can be used to offset capital gains.

• Switch ownership of capital producing assets. By transferring assets to lower taxpaying spouses/civil partners. If they pay a lower rate of tax on capital gains, they could also pay lower levels of tax from income received, such as dividends on shares.

• Compare the tax treatment of your investments. The top rate of income tax is 50%, compared with a top rate of CGT of 28%. Tax savings may be made by switching to investments which generate capital rather than income.

• Consider an Enterprise Investment Scheme (EIS) investment. If you have made a sizeable capital gain in the last three tax years, consider investing in a qualifying EIS, which can defer tax payable on capital gains and also provide income tax benefits.

Estate planning and inheritance tax

Often overlooked and referred to as ‘voluntary’ in some spaces, opportunities are available at the end of the tax year to individuals looking to reduce this future tax.

Our tips:

• Making annual gifts can reduce an individual’s estate for Inheritance (IHT) tax purposes. Each individual can gift assets up to a value of £3,000 free of IHT. Individuals who have not utilised their 2009/10 exemption can still do so before 6 April 2011, otherwise it will be lost. A married couple could make gifts of up to £9,000 each in April of this year and a combined investment of £18,000 could save £7,200 in future IHT liability on their estate.

• The small gifts exemption allows gifts of £250 to be given to individual beneficiaries each year, free of IHT.

• The normal expenditure out of income exemption allows regular gifts to be given out of income entirely free of IHT, without the need to satisfy the seven year survival period, providing they do not reduce the donor’s standard of living. Strict compliance to Her Majesty’s Revenue & Customs rules is essential. Anyone considering using this relief should seek advice.

• Obtain advice on other methods of reducing your IHT liability, such as making lifetime gifts, Trusts, IHT efficient investments and taking out life assurance, to provide for any future potential IHT liability.  

Savings and investments

I list a select few tax planning investment opportunities below, .

• Pensions: Following the recent significant changes in legislation, this is becoming an increasingly complex area however contributions into pensions attract generous tax relief. Speak to our consultants:

  • To determine what amount can be put into pension arrangements both in the current and following tax years and whether using salary sacrifice arrangements (which reduce national insurance contributions) are appropriate for your requirements.

  • To establish if you need to take any action following the recent changes in pensions legislation and whether your pension arrangements are being optimised.

  • To learn about making contributions for others i.e. spouses and children.

• Make tax-free investments. Consider investing or topping up Individual Savings Accounts (ISA’s), which allow you to invest up to £10,200 (£5,100 in cash) in each tax year. No tax is applicable on capital gains or interest on savings, making this a valuable savings tool for most taxpayers. Regular savings, coupled with capital growth on the ISA investment over time, could result in significant sums being invested in such vehicles.

• Consider tax-privileged investments such as Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS). These are higher risk investments with generous tax breaks such as income tax relief at the outset (20% for EIS and 30% for VCT with maximum investment limits), which will reduce your income tax liability. Any gains made from the schemes will not be subject to CGT if held for a specified period. The schemes are generally high risk and complex and our consultants have significant expertise in this area to advise on their suitability to your personal circumstances.

• Life insurance products such as investment bonds and Maximum Investment Plans (MIPs) may also be suitable as tax deferral mechanisms. MIPs can also present significant tax savings for higher and 50% tax payers after they become qualifying investments. These are likely to prove popular for many individuals.