The Tories say the budget contained 40 new stealth taxes, and it's hard to find anyone who thinks Gordon Brown has made them better off. But there are ways to protect your cash from him. Here we look at 29 strategies for cutting your tax bill.
1. Aim to die poor.
The chancellor made great fanfare out of raising the inheritancetax (IHT) threshold from its current £285,000 (£300,000 from April) to £350,000, but this figure won't actually be with us until 2010-2011. So the truth is that the threshold isn't rising by much more than inflation and it certainly isn't rising by as much as house prices. The best way to thwart Brown on this one is to die poor, and the best way to do that is to give your money away.
You can give as much as you like in gifts of below £250 each. You can then make gifts of over £250 each as long as, combined, they don't total more than £3,000 (and they don't go to people already getting smaller
gifts a year). Parents can also give their children £5,000 on their marriage and grandparents can give £2,500 as wedding gifts without any liability.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
These all sound like small numbers and they are, but you can also give as much as you like out of your income, as long as it doesn't reduce your own standard of living. So, if you've a high income, from a pension or investments, you may as well give away any of it you don't use. You can also give away assets IHT free as long as you live for seven years after making the gift. For the first seven years what you have given away will count as potentially exempt transfers' (PET) and be subject to IHT if you die, but after that they won't be the taxman's business. A word of warning: you can't give something away, continue to make use of it and still call it a PET. So if you give a house away, you can't keep living in it and if you give a holiday cottage away, you can't keep holidaying in it unless you pay commercial rents to the new owners.
2 Give to your grandchildren via a bare trust.
If you want to give a large gift to a minor as a PET, you can do so via a bare trust so they can't get their hands on it until they are 18. Until then, any money in the trust is treated as the child's for tax purposes, as far as income tax and capital gain allowances are concerned, with one proviso: if the money came initially from the parents' income, above £100 will be treated as theirs for tax purposes.
3 Turn your capital into income.
You can give away any income you aren't spending with impunity, but you can't give away capital as easily, so you should therefore shift your asset mix to change one into the other, choosing high-income, lowcapital- return assets over the opposite, or even using an equity-release product of some kind to make your house produce income. But note that the sums on this may not add up. The home-reversion market is famously uncompetitive even if you are in your mid 70s you may find you'll only get paid 45% of the value of your home. If so, you could be better off paying IHT at 40%.
For FREE personal finance advice direct to your inbox every Monday, sign up for MoneyWeek editor Merryn Somerset Webb's weekly email, MoneySense. Click here to sign up now.
4 Make sure you file on time.
As is typical of a Brown budget, there were big changes hidden in there: one is the shifting forward by three months (from the end of January to the end of October) of the deadline for filing paper self-assessment forms. Miss it and you'll have to pay £100, plus interest on any tax owned. Brown calls it a fine, but you could see it as a stealth tax on those uncomfortable with the internet: if you file online, you still get until the end of January.
5 Spend.
There's no reason to leave your money to your children. If you've already spent decades supporting them and can't see why they need what you've left just because they've overstretched themselves with too big a mortgage, why not just spend the money you have left. That'll cut the IHT bill your heirs have to pay much more effectively than anything else.
6 Make a will.
If you don't, you can't guarantee the tax-effective distribution of your assets. The key, if you can afford to do so, is to leave an amount up to the nilrate band to someone other than your spouse and the rest to your spouse (there is no IHT payable on assets left to a spouse). You will then have removed £285,000 from risk completely and when your spouse dies she/he will be able to use the nil-rate band again, hence doubling the total tax-free amount you leave.
7 Understand deeds of variation.
If your spouse dies without arranging the above, you can assuming all beneficiaries agree use a deed of variation to change the terms of the will and take advantage of the chance to use the nil-rate band twice
8 Go non-dom.
Britain's 52 billionaries pay practically no tax. According to a study done for The Sunday Times by accountancy firm Grant Thornton last year, between them they paid a total of just £14.6m in income tax on their combined £126bn fortunes. They also paid practically no capital-gains tax. Britain's millionaires aren't doing too badly either: figures released by the HRMC show that they paid direct taxes at an average rate of only 34% last year, 1.5% less than those earning £500,000-£1m. So what's going on? The answer, says The Sunday Times, is that the UK is increasingly becoming an "onshore tax haven" for those who can establish "nondomicile status" for themselves, something that means they pay tax not on their worldwide assets, but purely on any they bring into the UK.
Being a non-dom is "extremely helpful", Mike Warburton of Grant Thornton told the FT. If his clients can get the status, he can "in practice help them avoid paying tax on anything but earnings sourced in the UK". So how do you do it? The key is to prove you have "severed ties" with the UK. If you have close relations in the UK, if you belong to a UK-based club of any kind, or if you leave too many assets in the UK, you might have trouble. Note that at the end of last year, British-born but Seychelles-based Robert Gaines-Cooper was judged to be too attached to the UK to be a non-dom (he was a member of the Rolls-Royce Owners Club). He now faces a bill for thousands of pounds in back taxes. Still, if you can manage it (it is easier if you have a foreign-born parent, or were born abroad), there are huge advantages to being a nondom.Your overseas assets will not be subject to IHT or capital gains tax and your overseas income won't be assessable for UK income tax. But if you do change your domicile, don't get too comfortable: a review is "ongoing".
9 Change your residency.
This is easier than going non-dom, as all you need to do is move to another county. As long as you live outside the UK and don't return for more than 90 days a year on average over a four-year period, or more than 183
days in any one tax year, it is straightforward. If you live outside the
UK like this for five years, you will not have to pay capital gains tax on UK
investments. If you are non resident for three years, you won't have to pay income tax on overseas income and if you move your money into an offshore bank account, you can then avoid paying income tax on it as it will no longer count as UK-sourced income. One thing to bear in mind is that the rules on what counts as part of your 90 days is no longer completely clear. It used to be that the travelling day did not count (so people could come in on a Monday and leave on a Wednesday, but only be deemed to have spent one day in the UK), but a recent ruling suggests that it is not days that count but nights. The result? That Monday to Wednesday trip suddenly takes up two days instead of one.
10 Use Gift Aid.
Where the scheme applies, the charity is entitled to reclaim a rebate
worth 28p for every pound given to it by an individual. Higher-rate taxpayers can then reclaim the rest via their tax returns.
11 Get an occasional lodger.
You can take in up to £4,250 in rent without having to pay any income tax on it.
12 Use your Isa allowance to the full.
We could avoid £382m in tax if everyone used an Isa, says Unbiased.co.uk. The Isa limit has been raised to £7,200 (with up to £3,600 of this allowed to be cash) from April 2008. The tax breaks aren't as good as they were, but at least anything in an Isa is still free of capital gains tax.
13 Shift your assets around inside a marriage or civil partnership to make the most of allowances. The CGT regime has been changed to allow a married couple or civil partners to transfer allowances between them (from April). This means you will now be able to make £18,400 of gains between you before being taxed without actually having to transfer assets between you. However, this is not the case with income tax, so if one partner is
in a higher tax band than the other, it makes sense for the higher earner to shift income-producing assets into the name of the lower earner in order to keep the total bill down. According to Unbiased.co.uk, £224m of tax is paid unnecessarily every year simply because taxpayers do not transfer enough income-earning assets to their non-earning or low-earning spouses.
14 Claim back tax if you aren't supposed to be a taxpayer.
Every year, £546m worth of allowances go begging and much of thisis due to non-taxpayers not claiming back basic-rate tax withheld from savings
accounts.
15 Understand tax credits and claim if you can.
Brown says that four out of five households will be better off as a result of
his budget, but this assumes that everyone claims and gets all the tax credits they are entitled to. But they don't. Of those entitled to Child Tax Credit, 10% never claim. Yet nine out of ten families are eligible to claim. You might not approve of being caught up in the benefits system if you are a high earner, but note that anyone with a household income of up to £58,000 (or £66,000 if you have a child under one) can claim. There's a total of £2.3bn up for grabs. If you paid some of it into the pot, you might as well get as much as you can back.
For FREE personal finance advice direct to your inbox every Monday, sign up for MoneyWeek editor Merryn Somerset Webb's weekly email, MoneySense. Click here to sign up now.
16 Fill up your child trust funds.
If grandparents or godparents want to give them money, their CTF is a
great place for it. It will accumulate completely tax free and can be
shifted into an Isa when they hit 18, assuming Isas haven't been
abolished by then.
17 Get childcare vouchers.
Not all employers offer a voucher scheme, but if yours does, you should use it. It works like this. Instead of taking £55 of your salary in your pay cheque each week, you take it as a voucher exchangeable for childcare with registered nurseries, nannies and childminders. This might sound pointless, but here's the good bit: the voucher is given to you pretax, so
you end up paying no tax at all on that £55. In total, basic-rate taxpayers can save a total of £858 a year in tax and higher-rate taxpayers can save £1,066 a year. Note that both parents can claim the relief, so if you're both working, you can save a total of £2,132 a year. This is currently about the closest you can get to free money.
18 Give to your child via a stakeholder pension.
If you make the maximum net contribution allowable for non-earners of £2,808 (£3,600 grossed up), each year they'll get a huge boost to their pension, thanks to the early start. And unlike with most trusts, they won't get to squander it when they are 18.
19 If you are a frequent trader, consider spreadbetting instead of share dealing. It will save you a real fortune in stamp duty.
20 Buy farmland.
Farms are considered business assets, and as such are free of inheritance tax once they have been owned for two years. However, this loophole is not as good as it used to be, says the Financial Times. A tribunal has recently ruled that while you still get relief for all the land and farm buildings, you won't get it for the full market value of the
farmhouse as well, just on its "agricultural value".
21 Buy timber.
Commercially managed woodland in the UK can be passed on free of IHT once it has been owned for two years; it qualifies for capital-gains rollover relief (you can avoid tax by reinvesting the gains from the sale of another asset into forestry); and income derived from commercial woodland is free
of income tax and corporation tax.
22 Invest in Aim stocks.
There has been some suggestion that the Aim market (stocks listed on which count as business assets for tax purposes) might lose its tax advantages, but the London Stock Exchange claims to have had discussions with the Treasury and says that any worries are "unfounded". So most Aim stocks will continue to be free of IHT after being held for two years. Any capital gains on them will also attract taper relief at the higher level (you only pay tax on 50% of your gain after one year and 25% after two years). A variety of companies run what they call business property relief schemes (BRP), which offer 100% protection from IHT if the investment is set up at least two years before the person dies, and which invest mainly in Aim-listed shares. Close Fund Management runs one: the average age of investors in it is 81.
23 Invest in VCTs.
These are quoted isted firms whose purpose is to invest funds in smaller, unquoted trading companies. They aren't as attractive as they used to be Brown has put further restrictions on the size of the investments the funds can make, which will raise the risk profile of most funds. However, you're still getting 30% tax relief when you invest in them, which is not to be sniffed at. The new size limit also applies to Enterprise Investment Schemes (EISs, into which you can put £400,000 a year), but these are still pretty attractive they offer income-tax relief of 20% and allow you to defer capital-gains tax. Finally, shares in EIS companies are exempt from IHT after you have owned them for two years, and after three years they can be sold completely free of capital gains tax too.
24 Don't write off National Savings & Investments.
It sounds like an old-fashioned place for your money, but it might still be
a good one, given that the returns on NSI schemes come tax-free. The new NSI 5- Year savings certificate pays 1.10%, plus the level of inflation as measured by the RPI inflation index (now 4.6%), a level a higher-rate taxpayer would have to be making over 9.5% elsewhere to beat. You
can invest £15,000 in each issue. Note that you don't have to pay income tax on premium-bond winnings either.
25 Cut your national insurance bill with salary sacrifice.
You give up some of your wage, hence removing it from the national-insurance net. Your employer then pays it directly into your pension fund. The Sunday Times calculates that if you earn £30,000 and contribute £1,000 to a pension scheme, your current NI bill is £2,745. But if you take a salary cut to £29,000 and the company puts an extra £1,000 into your pension, you will save £110 a year in contributions. The benefits
of this are best for lower-rate taxpayers, but are still worth something for
higher-rate taxpayers if they take a relatively big pay cut.
26 Make sure you have the right tax code.
Most of us assume that between them the Inland Revenue and our employers are capable of assigning us the correct code. In fact, one in five of us is paying the wrong amount of tax, thanks to having the wrong code.
You can check your code at Direct.gov.uk.
27. Make good use of your pension.
A few weeks ago, The Sunday Telegraph ran a story under the headline "Higher-rate tax is now optional". This isn't completely true, of course, but it is sort of true, in that you can now contribute a huge amount of money into your personal pension (your entire annual salary up to a limit of £215,000) and get tax relief on the lot. Twenty-two per cent base-rate tax is automatically rebated to your pension account via your provider and higher-rate taxpayers can then get the rest back via their self-assessment form. Contribute £7,800 and the Government will top this up with basic-rate tax relief of £2,200, making a total investment of £10,000. You then claim a further £1,800 in higherrate tax relief via your next tax return. Once inside your pension, your money grows tax-free. Then, at any age between 50 and 75 (55 and 75 from April 2010), you can normally take up to 25% of the value of your fund as a tax-free lump sum.
For FREE personal finance advice direct to your inbox every Monday, sign up for MoneyWeek editor Merryn Somerset Webb's weekly email, MoneySense. Click here to sign up now.
We'd recommend pension saving via a self-invested personal pension simply because they allow you to invest in whatever you like (funds, bonds, shares, and even cash). You can also use your Sipp to crystallise capital gains while still holding on to a stock, points out Hargreaves Lansdown: if you sell a security, you can create a capital gain, but immediately buy the shares back for your Sipp so that you remain a holder (you can't do this outside a Sipp or an Isa). It is also possible to transfer assets to your Sipp directly without the sale and buy back if your provider allows it. If you have a large amount of money you want to put in your Sipp, you could pay it all in at once, as long as it isn't more than your entire annual salary, but then you'll only get 40% relief on part of it. If you earn £80,000 and have £80,000 to put in, you should do it over two years in two lots of £40,000 to make sure you get 40% relief on the lot.
But make sure you don't go over the lifetime limit (£1.6m for 2007-2008). If you're getting close to it, you can register for protection so you don't have to pay tax on the extra (anything over £1.6m is taxed at 55% if you don't register). You have until April 2009 to do this. Clearly, you don't want to have all of your assets tied up in the pension system the constant changes to pension regulations and Government failure fully to reform the annuity system make this unattractive but the tax perks are so good it's worth using the system as a big part of your retirement strategy.
28. Get a G-Whizz and a green house.
It looks like going green is about to become one of the best ways to avoid tax. In his budget last week, Gordon Brown suggested that we all bought zero-carbon homes. Any that cost under £500,000 are to be exempt from stamp duty until 2012 and those over £500,000 will get a flat-rate discount of £15,000 on any duty due until the same time. It's a nice idea, but we aren't entirely convinced it's going to work we'd expect the price of any such homes in the UK to rise by the amount of stamp duty saveable immediately. You will have the consolation of paying your money to a developer rather than the Government, but we doubt you'll actually save any money. Another problem: some papers claim there are already 12 zero-carbon houses in the UK, but The Independent says there are "almost zero" such homes in the entire country (they need to have "zero net emissions of carbon dioxide from all the energy use in the home"). Either way, it might be a while before green enthusiasts can find one to buy at all.
A better way to save tax fast might be to drive a G-Whizz (pictured). This will set you back around £7,000, but the little cars are "surprisingly nippy off the mark", says The Guardian, and will do 40mph more than enough to keep up with urban traffic. And they could also save you a fortune. Charging them overnight will add a mere £50 to the average household's electricity bill (and no fuel tax to pay). In London, the extra savings are vast: G-Whizz drivers do not have to pay the congestion charge (also a tax, whatever Ken Livingstone says) and in some boroughs, including Westminster, get free parking. They also don't have to pay any road tax.
29. Get all the refunds you can.
Demand a refund if you have been paying tax on a foreign home owned
by a company. Until now, homeowners who have bought a house abroad via a company have faced a tax bill on the rental value of their homes, as they are considered to be receiving a benefit in kind from the company when they use it. However, the chancellor has now said that no such tax will be payable, as long as four conditions are met. The company must exist solely to own the property in question; it must be owned by individuals (so take advice if yours is owned by a trust); it must have no
other assets; and it can't be funded by any other company. Those who have been paying the tax (and not everyone has been entirely honest with the taxman) may now be entitled to a refund, says The Independent.
The U-turn is retrospective and Grant Thornton estimates that around 20,000 people should get back about £4,000 for every year they have paid the tax in the past. Another thing you might be entitled to refunds on is your flight taxes.
Since Gordon Brown increased airpassenger duty in February, the
amount of tax and duty you pay to fly has gone up substantially it can,
says The Guardian, be up to £150 on a long-haul flight. However, if the
passenger doesn't actually fly, the airline doesn't pass the tax on to the
Government and you should therefore be able to reclaim it. There was a
time when these taxes were low enough to be barely worth the bother
and expense of reclaiming, but that time is long gone. This is something
that businesses in particular might like to pay attention to if you have
large numbers of employees flying, changing flights and cancelling flights,
you may be paying tax you don'tneed to. The downside, says Miles Brignall in The Guardian, is that the airlines charge very high administration charges for returning your taxes (EasyJet charges £35 and BA £30), although there is now talk that much like the banks' penalty fees these fees may soon be deemed excessive and have to be repaid by the airlines.
