Winters Chartered Accountants and Registered Auditors
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London EC4M 7JE
England, UK

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PLEASE NOTE: This article was correct at the date of going to press, but details and rates described are liable to change over time – please check the tax rate section of our newsletter for up to date details.

SPECIAL SECTION - Year End Tax Planning Tips 2002

Some of the opportunities discussed below may require action to be taken before the tax year end on 5 April. Changes may be made in the Budget to block some of the opportunities described - action may be needed now. Please talk to us soon if you wish to discuss any of the issues raised.

Year End Tax Planning Tips

Income tax and the family

Married couples
Marriage gives limited scope for income tax planning but spouses are taxed separately. Therefore, by careful planning, maximum use can be made of personal reliefs and the starting and basic rate tax bands. Given that the personal allowance is not transferable, consider transferring assets (by way of outright and unconditional gift) to even up incomes.

Income arising from jointly owned assets will be taxed 50/50 on each spouse unless a declaration is made to the Inland Revenue stating that the asset is owned in unequal shares. Such a declaration must be made in advance of the income being received on Form 17.

If the husband or wife is self-employed their spouse could be employed or taken into partnership as a means of redistributing income. Care must be taken because the Inland Revenue may look at such situations to ensure they are commercially justified.

If a spouse is employed by the family company, the level of remuneration must be justifiable and the wages actually paid to the spouse. The National Minimum Wage rules may also impact.

Taxpayers aged 65 or over should consider how to make full use of the available age allowance. The higher allowances are progressively withdrawn once income exceeds £17,600. This may be avoided by switching to non-taxable or capital growth oriented investments.

Children

Each child has their own set of allowances and tax bands. However, if the source of income was provided by a parent to a child under 18 and unmarried, the income is taxed on the parent. Where such income does not exceed £100 (gross) per annum it remains taxable on the child.

In the past, if a parent made an outright gift to a child and the income was accumulated (ie not paid out) then the income was taxed on the child, not the parent. This was known as a ‘parental bare trust’. Such trusts continue to be effective only if they were set up before 9 March 1999. It may be better to consider income from other relatives and/or earnings from the family business for teenage children as a means of using personal allowances.

Alternatively, families may wish to consider investing for capital growth (see Capital Taxes) or contemplate pension contributions under the new regime (see Pension Contributions).

Non-taxpayers
Anyone whose personal allowances exceed their income is not liable to tax. Where income has suffered tax deduction at source a repayment claim should be made. In the case of bank or building society interest, a declaration can be made by non-taxpayers (including children) to enable interest to be paid without deduction of tax on form R85.

The 10% income tax starting rate applies to all types of income so that if the only source of taxable income is bank or building society interest the first £1,880 (for 2001/02) is liable at only 10%. If 20% tax has been deducted at source, a repayment of tax may be due.

Remember that tax credits on dividends can no longer be repaid - ensure non-taxpayers have other sources of income to utilise their personal allowances.

Family Companies

If the payment of bonuses to directors or dividends to shareholders is contemplated, careful thought should be given as to whether payment should be made before or after the end of the tax year. This will affect the date tax is due and possibly the rate at which it is payable.

Alternatively, the payment of a pension contribution by the employer on behalf of the employee is tax and national insurance free. This is an area which should be reviewed as a matter of urgency.

Tax tips content  | General newsletter | Please contact us with any questions

Giving to Charity

The rules on charitable giving have been revised. Individuals can make any charitable donation under the Gift Aid scheme. This allows the charity to claim back tax at 22% from the Inland Revenue and increases the value of the gift. For higher rate taxpayers, such gifts will qualify for tax relief at 40%.

Donations eligible for tax relief can also continue to be made by ‘Give As You Earn’ (regular deduction from salary) and there is no longer any upper monetary limit on the donations that may be made under this scheme. A further advantage of this scheme is that the Government will pay a 10% supplement to the charity on all donations made under the scheme for three years from 6 April 2000.

A further addition to the menu of tax efficient ways of giving to charity is that tax relief is now available on gifts to charities of listed shares and securities, unit trusts, shares in open ended investment companies and interests in offshore funds.

Tax tips content  | General newsletter | Please contact us with any questions

Investments ... Are Yours Tax Efficient?

There is a wide range of investments with varying tax treatments. We take a look at some of the main ones which have special tax rules.

When choosing between investments always consider the differing levels of risk and your requirements for income and capital in both the long and short term. An investment strategy based purely on saving tax is not advisable.

ISAs allow savers to invest up to £7,000 per tax year in a tax favoured savings plan. Investments in the plan are free of income tax and capital gains tax (CGT). Up to £3,000 can be put into cash investments and £1,000 maximum into life assurance linked investments - the balance goes to equities. The limit of £7,000 per tax year is set until April 2006.

ISAs had previously been restricted to those aged at least 18 but, from 6 April 2001, 16 and 17 year olds are able to open cash ISAs.

Existing TESSAs and PEPs continue but no more funds can be invested in a PEP and no new TESSAs can be opened.

TESSAs - tax-free interest on capital of up to £9,000 over a five year period. If your TESSA has not reached its maturity date, you may still be able to pay in the annual maximum of up to £1,800. If your TESSA is going to mature soon, the capital may be transferred into a TESSA-only ISA without affecting the annual ISA limits.

PEPs - whilst no new funds can be invested, it is now possible to consolidate single company PEPs with a general PEP or create a general PEP out of single company PEPs. This will have the advantage of allowing more flexibility for sales and purchases of investments and may also reduce plan charges.

Taxpayers who have higher rate income tax liabilities or who would otherwise find themselves with a CGT bill should find the equity element of ISAs useful.

The cash element of ISAs is more attractive than TESSAs because cash can be withdrawn at any time without a tax penalty.

Other Investments

National Savings products are taxed in a variety of ways. Some, such as National Savings Certificates, are tax-free.

Single premium life assurance bonds and ‘roll up’ funds provide a useful means of deferring income into a subsequent period when it could be taxed at a lower rate.

The Enterprise Investment Scheme (EIS) allows income tax relief at 20% on new equity investment (in qualifying unquoted trading companies) of up to £150,000 in any tax year. CGT exemption is given on shares held for at least three years (five years for shares issued before 6 April 2000).

Capital gains realised on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred where gains are reinvested in EIS shares.

A Venture Capital Trust (VCT) invests in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends (although the tax credits are not repayable) and on any capital gains arising from disposal of the shares in the VCT. Income tax relief at 20% is available on subscriptions for VCT shares up to £100,000 per tax year so long as the shares are held for at least three years (five years for shares issued before 6 April 2000). Capital gains can be deferred into VCT investments in a similar way to EIS.

Enterprise Zone Trusts allow investors to invest in qualifying property and obtain immediate tax relief of up to 40% on their investment. There is no upper limit on the investment.

Film partnerships offer a relatively new method of obtaining tax relief. An investor becomes a partner in a business which purchases a qualifying film. The loss created can be set against income and/or capital gains, to give higher rate tax relief.

Finally, review your mortgage. With interest rates falling to very low levels, spare capital may be better employed paying off your mortgage than investing in bank and building society accounts, even if they are ISAs!

National Insurance Matters

If a spouse is employed by the family business it is probably now worth paying earnings in 2001/02 of between £72 (the lower earnings limit) and £87 (the earnings threshold) per week. There will be no employees’ contributions due on the earnings but entitlement to a state retirement pension and certain other benefits is preserved. No employer contributions are payable if earnings do not exceed £87 per week in 2001/02.

For the self-employed there is a requirement to pay a flat rate contribution (Class 2). If your profits are low you can apply for exemption. The limit for 2001/02 is £3,955. If contributions have been paid for 2001/02 and it subsequently turns out that earnings are below £3,955 a claim for repayment of contributions can be made. The deadline for this claim is 31 December 2002.

Tax tips content  | General newsletter | Please contact us with any questions

Capital Taxes - Change or No Change?

Capital gains tax was fundamentally revised and revamped in 1998. Further changes have been made since and the promised 10% effective tax rate on gains made on disposals of business assets will apply for some as soon as 6 April 2002.

Inheritance tax on the other hand has, so far, survived relatively unscathed. Changes may still be on the cards and would certainly have the effect of making the regime less generous than it is currently - you may need to act now! Remember we are here to help - please talk to us soon about any of the issues raised here.

Capital gains
The annual exemption for 2001/02 is £7,500. Note that husband and wife both have their own annual exemption. A transfer of assets between them may enable them both to use this fully. Consider selling chargeable assets before 5 April 2002 in order to realise gains which utilise this exemption. Bed and breakfasting (sale and repurchase) of shares is no longer effective but there are two variants which still work:
  • sale by one spouse and repurchase by the other
  • sale, followed by repurchase via an ISA.

These techniques may also be used to establish a loss which can be set against other gains.

If disposal is deferred until a date after 5 April 2002 then not only will next year’s annual exemption be available but the tax payable will be due a whole year later. If the asset is a business asset owned before 6 April 1998 additional taper relief will also be available. The rate for a disposal in 2001/02 is 50% and in 2002/03 is 75%.

The introduction of taper relief and the withdrawal of retirement relief means that entrepreneurs aged over 50 thinking of selling their businesses need to think very carefully about the timing of the decision. 2002/03 will see the final year of retirement relief. A disposal in 2002/03 will mean less retirement relief compared to 2001/02 but more taper relief. Consequently, the timing of the disposal of a business is crucial.

The calculation of retirement and taper relief can be complex – please talk to us before you take any action.

Other ideas
A capital gain can be deferred if the gain is reinvested in the shares of a qualifying unquoted trading company via the EIS and VCTs.

A capital loss can be claimed on an asset which is virtually worthless. Where the asset is of negligible value by 5 April 2002 the capital loss can be used in 2001/02.

Children also have their own annual exemption of £7,500, so it may be preferable to invest for capital growth rather than income growth; for example if the investment is in zero coupon preference shares, there will be no income to be taxed on the parents and the first £7,500 of any gain is tax-free in the child’s hands.

Second hand endowment policies (SHEPs) can also be very attractive for families. Purchasing a SHEP will give an initial cost plus subsequent premiums payable to maturity. On maturity a capital gain arises, less the purchase cost and premiums paid…….and, of course, each family member has an annual exemption of £7,500!

Of course, some number crunching needs to be done at the outset but SHEPs can provide an attractive investment and tax planning opportunity.

 Inheritance tax (IHT)
 Changes which restrict the scope for planning or result in a higher tax bill on death are a possibility for this year’s Budget.

The use of trusts is a common method of reducing exposure to capital taxes and hence they are particularly vulnerable to attack.

Meanwhile:

  • Check that your Will carries out your intentions in a flexible and tax efficient manner.
  • Consider IHT planning by making use of the many IHT reliefs including:
    - ensuring the nil rate band of £242,000 is used for both husband and wife
    - potentially exempt transfers
    - the £3,000 annual exemption, which can be carried forward for one year
    - unlimited small gifts of up to £250 per individual per year
    - gifts in consideration of marriage by parents of bride and groom (up to £5,000), grandparents (up to £2,500) and others (up to £1,000)
    - normal expenditure out of income, with the need to establish a regular pattern of giving as early as possible
    - gifts to charities and political parties.

Don’t forget that as life expectancy increases, failure to retain sufficient funds to meet future financial needs becomes a greater problem.

IHT planning is often very simple, with the chance to make considerable savings. One sentence in a Will can save £96,800 and the earlier the planning the better.

Please talk to us as soon as possible if you are interested in any of these ideas.

Remember if you don’t act before Budget Day the opportunity may be lost forever - don’t delay.

Company Cars

Although the company car remains a popular perk it may become less attractive from 6 April 2002.

Changes in the taxation of company cars take effect in April 2002.

If you have the ability to choose then it may be worth considering giving back the keys to the company car and arranging to receive a tax-free mileage allowance for business travel in your own vehicle.

Remember that the company car charge is currently reduced where business mileage is at least 2,500 per year and is lower still if it is 18,000 or more. If you are close to either of these thresholds, then review your business journeys before the end of the tax year. Don’t forget that the Inland Revenue exclude travel between home and the normal workplace from the business mileage element.

Arrangements for the provision of fuel should also be reviewed to ensure no unnecessary tax charges arise. The car fuel benefit charge is increasing substantially year on year. It may be uneconomic to continue with the provision of private fuel.

Perhaps the answer is a company bike. With the prospect of a tax-free mileage rate set at 20p per mile for cycle use on business trips and six tax-free breakfasts a year, it may be worth serious consideration!

Tax tips content  | General newsletter | Please contact us with any questions

If you are an employer the end of the tax year marks the start of the form-filling season!
Here’s a reminder of important deadlines for sending information (and money!) to the Inland Revenue.

19 April 2002 - Any 2001/02 PAYE and NIC deductions not paid over will result in interest on the overdue amounts.

19 May 2002 - Employers’ year-end returns (P35/P14/P38) due for submission. There is a penalty for submission of late or incorrect returns.

31 May 2002 - The P60 (certificate of pay and tax deducted) should be provided to each employee.

6 July 2002 - Submission of P11Ds and P9Ds which show details of benefits and expenses paid to employees and directors. There is a penalty for submission of late or incorrect returns. Employees must also be given a copy of their P9D/P11D by this date.

19 July 2002 - Class 1A NIC for 2001/02 on most benefits in kind provided to employees must be paid. The normal methods of making payment apply and a special Class 1A NIC payslip is sent out in April.

19 October 2002 - Payments under PAYE settlement agreements must be made, including Class 1B NIC.

Pension Contributions

Despite much speculation to the contrary tax relief is still available at the taxpayer’s top rate of tax. So a higher rate taxpayer can pay £100 into a pension scheme at a cost of only £60. With the inability of the state to provide adequate levels of retirement pensions widely acknowledged, it is more important than ever to provide for a secure old age.

Under new rules introduced for personal pensions (not retirement annuity premiums) on 6 April 2001, all individuals, including children, can make personal pension contributions of £3,600 (gross) without any reference to earnings. Higher amounts may be paid based on net relevant earnings (NRE). The maximum level of contributions is determined by the taxpayer’s age at the start of the tax year. Earnings in excess of £95,400 (for 2001/02) are ignored.

Under these rules an individual can lock in NRE of a good year by giving the pension provider evidence of those earnings. This year is then used as the basis of contributions for that year and the next five.
Example – an individual has peak earnings in year one and a lesser peak in year three.
Year Earnings £000 Base year NRE £000
1 50 1 50
2 30 1 50
3 40 1 50
4-6 25 1 50
7-8 20 3 40

These rules are enhanced where an individual ceases to have relevant earnings. Contributions for the five years after the year of cessation can be based on NRE for any of the six years up to and including the year of cessation.

These rules may allow a company to pay remuneration in one year and dividends in the following five. This would enable a director/shareholder to make personal pension contributions every year and the company and individual to save national insurance.

Directors of family companies should, as an alternative, consider the advantages of setting up a company pension scheme. If a spouse is employed by the company consider including them in the scheme. Even with modest salary levels, significant benefits can accrue. Please contact us for further advice in this area.

Pension funds can no longer reclaim dividend tax credits, so there may be a case for paying extra contributions to make good the potential loss of income.

Tax tips content  | General newsletter | Please contact us with any questions

Disclaimer - for information of users
This newsletter is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the authors or the firm.

 

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