By Stuart Aikman, National Tax Consultant At Smith & Williamson

At this time of year, many readers will be galvanising themselves into gathering the information they need to meet the 31 January tax return deadline, but it’s also a great opportunity to think about structuring your finances more tax efficiently, ahead of the end of the tax year in April.

Avoid penalties

Submitting your online tax return by the end of January is particularly important this year, as the late filing penalty regime has changed. Missing the deadline by just one day will trigger a penalty of £100, whether or not any tax is outstanding. Further penalties will be charged if submission is more than three months late.

There are notification obligations on starting in business, or on becoming a partner, and you need to keep a constant eye on the amount of actual and projected turnover for VAT.

Make use of allowances and lower-rate tax bands

It’s common to find married couples where one has a substantial income, while the other has spare lower rates or even personal allowances (currently £7,475). Do you own any income-producing assets that could be transferred and held in a more tax efficient way? HMRC seems relaxed about the transfer of certain assets into a spouse’s name, such as property and quoted investments, but is much stricter about shares in private companies, so care needs to be taken here.

The 60% trap

The personal allowance is taken away from individuals whose total taxable income falls within the band £100,000 to £114,950, at the rate of £1 for every £2 of excess income. This gives an effective tax rate of 60%. So any tax reliefs achieved in this band, for example by a gift aid payment or a pension contribution, are magnified.

Sole traders and partners

Most business owners are familiar with the concept of claiming capital allowances on plant and machinery actually used in the business. It is less well known that capital allowances can be claimed on certain embedded fixtures in owner-occupied buildings, such as air conditioning, toilets, electrical or cold water systems.

Stringent new rules for claiming relief will come into force in April 2012, so this is an area to focus on now. Great care will be needed, particularly with the documentation for the sale of second-hand buildings.

Also, watch the timing of expenditure qualifying for the annual investment allowance, as the limit reduces from £100,000 to £25,000 with effect from 6 April 2012 (1 April for companies). Care is needed for pro-rating these amounts for accounting periods spanning this date.

Pension planning

From April 2011, the annual allowance for pension savings was reduced to £50,000, but with some scope to make use of unused allowances from the three preceding years. The opportunity to make use of any unused allowance from 2008/09 will be lost if not used by 5 April 2012.

From April 2012, the lifetime allowance for the value attributed to benefits is changing from £1.8m to £1.5m. If you’ve got a big pension pot, think carefully about taking benefits and/or registering for the fixed protection of the £1.8m limit before 6 April 2012.

At the other end of the scale, anyone can invest up to £3,600 a year into a pension scheme, whether or not they have taxable income, and obtain 20% tax relief. So assume that a father is making maximum pension contributions, but his wife has no earnings and they have two children. The father could invest the net sum of £2,800 a year into separate pension plans for his wife and each of his children, and the pension plans would each receive £3,600.

Capital Gains Tax annual exemption and losses

Husbands and wives both have annual CGT allowances of £10,600 for 2011/12, which can be used with simple planning. At 28% the annual exemption is worth £2,968 per person (£5,936 per couple), so it’s not to be sneezed at.

The timing of disposals could be critical, especially near the end of the tax year; and husband/wives and civil partners should consider transferring (unconditionally) between them any shares with in-built gains or losses to maximise these allowances.

Capital Gains Tax entrepreneurs’ relief

The entrepreneurs’ relief lifetime limit is currently set at the very valuable sum of £10m, so it’s imperative that the qualifying conditions are met in advance of any disposals. In order to qualify for entrepreneurs’ relief on the disposal of shares in an unquoted company, an individual must have been an officer or employee for the 12 months prior to the sale and must have owned at least 5% of the ordinary shares and voting rights during that time.

Inheritance Tax planning

The frozen nil-rate band means that individuals should take advantage of the full range of exemptions and reliefs. Most lifetime gifts are exempt, provided the donor survives the date of the gift by seven years. Regular gifts made out of excess income are exempt, for example, a grandparent paying for a grandchild’s school fees.

A reduced Inheritance Tax rate of 36% will be introduced for deaths on or after 6 April 2012, provided certain conditions are met regarding the level of charitable legacies. Thought needs to be given to what this might mean for your estate and the effect of obtaining the reduced rate. Based on the new rules, where the proposed charitable legacies in an estate exceed 4% of a ‘component’ part of the estate, increasing them to 10% could lead to more funds passing to the other beneficiaries.

This article provides an outline of some tax-planning points to consider. For further information please email Stuart Aikman at stuart.aikman@smith.williamson.co.uk, or call 020 7131 4256.

Disclaimer: By necessity this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Article correct at time of writing.

Smith & Williamson Limited, Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.

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