With spring arriving, tax may be the last thing on your mind. However, with a bit of thoughtful and intelligent planning you can make sure you don’t end up paying more tax than you have to.
There are a variety of tax allowances available to encourage certain behaviour, such as saving and certain types of investment. However, with the end of the tax year (2013/14) on 5 April, time is running out for you to take advantage of them. At the same time, the government has tightened up some of the rules surrounding them, making one popular strategy impossible.
Isas make sense
The most straightforward and well-known tax allowances for individuals come in the form of individual savings accounts (Isas).
You can invest £11,520 in total in this financial year, without paying tax on either the interest or capital gains. You will still have to pay 10% tax on share dividends (except for real-estate investment trusts, which are treated slightly differently), so for basic-rate taxpayers it won’t immediately make a difference (though there are still potential future capital gains benefits to consider).
But it’s a big saving on the 32.5% rate for higher-rate income-tax-payers, and the 37.5% for those whose income exceeds £150,000 a year. After the government had a change of heart 18 months ago, you are now allowed to hold Aim-listed shares in an Isa too.
Up to £5,760 of the annual Isa allowance can be put in cash Isas. The money can either be transferred as a lump sum during the financial year or in instalments. But if you withdraw some money during the year, you cannot then top up your annual allowance with the sum you took out.
Also, it is worth checking the withdrawal conditions when you put money in an Isa, as some acconts could charge you if you want to take out cash before the term ends. The annual Isa allowance rises to £11,880, with up to £5,940 in cash, from 6 April when the new tax year begins.
Pensions are tax shelters too
Of course, you can also put money into pensions, getting tax relief on contributions up to £50,000 per year. However, before you use your pension allowance, it is best to use up your Isa allowance. In our view, Isas are a much better deal than conventional pensions (which also have their own allowances).
This is because they are much more flexible, allowing you to access the money with few of the restrictions that come with pensions. Not only are Isas much more flexible, but the government seems set on slashing the total size of your final pension pot that is tax free, as a form of stealth taxation. Starting with the next financial year, the pension contribution allowance will go down by £10,000 to £40,000 per year.
An Isa for junior
Parents can take out a Junior Isa in their child’s name. But there are key differences. The limit of £3,720 is much lower than for a conventional Isa. More importantly, the money cannot be touched until the child turns 18, and at that point, they take control.
So while it can be a good way for parents to get children used to the idea of saving and investing, you won’t necessarily be able to dictate what they do with it – they might prefer a new car to university fees.
For even longer-term savings for children or grandchildren, you can put up to £2,880 into a stakeholder pension (which the government tops up to £3,600) in a child’s name.
Protect capital gains
One tax that can hit the investor hard is capital gains tax, which applies when you sell an asset (with the exception of your primary residence) for more than you bought it. In the past, the value was indexed to inflation, so you only paid if the asset went up in real terms (adjusted for inflation).
Sadly, this hasn’t applied for several years, so you pay capital gains tax on all nominal gains. Therefore it’s especially important to stagger sales so you can take advantage of the £10,900 capital gains allowance. You can also sell assets to crystallise losses, to offset against gains elsewhere. Other than your home, your car, personal possessions worth up to £6,000 each (like jewellery or antiques) and foreign currency you bought while abroad are exempt of capital gains tax.
There is no extra capital gains tax due on property that is moved between married partners. This means you might consider using asset transfers to enable you to split the amount for the purposes of the allowance. One example is where a spouse bought shares for £40,000 and wants to sell them for £55,000. Normally, the £15,000 profit would be more than the allowance. But if the spouse gave half the shares to his or her partner, they would each make a profit of £7,500 (which would be within their annual allowance).
No more bed and breakfasting
However, there is one trick that you’re not allowed to use any more. In the past it was common for people to use up the allowance by selling liquid assets (like shares) just before the deadline, booking the profits, and then buying them back up again in the new tax year (thus resetting the benchmark). This was known as ‘bed and breakfasting’. However, in an attempt to discourage this practice, HMRC instituted a rule that means that if you buy back the same assets within 30 days they are counted as the same holding.
Other tax benefits include those for small business owners or landlords: they can deduct up to £250,000 a year in capital expenditure. Landlords can also deduct the cost of gardeners, cleaners and the fees charged by letting agencies. This means that if you are planning to carry out a series of major renovations that are likely to exceed the annual rent, such as a new kitchen, a new bathroom and a boiler, it might be worthwhile staggering them.