Happy new (tax) year.
Smoking, dieting and tax-planning: which is the odd one out? Well, if the last is the only one that does not feature in your new year resolutions, maybe it's time to reconsider -- not only is it less painful than the others, it could leave you glowing with financial health. The actions required will vary, but the following are among the more common pre-year-end opportunities.
Check the tax you are paying on your company car
* Keep an eye on your mileometer. Driving over 2,500 or 18,000 business miles in a tax year usefully lowers the taxable benefit -- at the moment. From 6 April 2002, the tax on company cars will be based on carbon dioxide emissions and there will be no business mileage discounts.
* Is it time for a change? Many employers offer a cash alternative to a company car, and it maybe more cost-effective to run a private car where business mileage is low.
* If your employer pays for your private petrol, check how much you have used this year and compare the cost with tax. Repaying the cost of the petrol can be cheaper.
Look at your savings and investments
* Consider maximum contributions to ISAs. The highest subscription remains 7,000 [pounds sterling], of which no more than 3,000 [pounds sterling] may go into cash and 1,000 [pounds sterling] into life insurance.
* Look for tax-free investments. Enterprise investment schemes and venture capital trusts (VCTs) offer income tax relief at 20 per cent and capital gains tax relief on subscription for eligible shares in qualifying companies. You can put up to 100,000 [pounds sterling] a year in a VCT. Income tax relief is limited to a subscription of 150,000 [pounds sterling] into an enterprise investment scheme, but capital gains tax deferral is unlimited.
Make sure you still get the best deal when you retire
* Make better use of your pension relief by maximising your contributions to personal pension plans and annuity policies. The ability to carry forward unused relief under personal pension relief rules ceases from 6 April 2001.
* Revisit your pension policy. Consider how many years it is until you retire; past performance of the fund; whether the pension portfolio is sufficiently well spread to reduce volatility but maximise scope for growth; and whether costs levied on the policies are still competitive.
Check the tax you pay on financial gifts
* You can make gifts of up to 3,000 [pounds sterling] free of inheritance tax each year and this allowance can be carried forward for one year. Any excess will still be tax-free if you made the gift to an individual or certain types of trust and you live for seven years after the gigo. Also, don't forget other reliefs, such as the small gifts (250 [pounds sterling]) and marriage gifts exemptions.
* Update your will. There are many simple tax-planning techniques, such as using the inheritance tax nil-rate band upon the death of a spouse.
Make the most of retirement relief
* If you are over 50, maximise retirement relief when disposing of business assets. This will be abolished from 5 April 2003, but, at present, retirement relief can reduce a tax bill of 240,000 [pounds sterling] on a 600,000 [pounds sterling] gain to 90,000 [pounds sterling]. But look before you leap -- taper relief increases the longer you hold an asset, and you need to take into account the interaction of retirement relief with taper relief and other reliefs.
Look at how much capital gains tax you pay
* Use up your 7,200 [pounds sterling] exemption from capital gains tax, as it can't be carried forward. If you exceed this amount, split your sale over the tax year-end to take advantage of two annual exemptions or transfer assets between spouses.
* Take care with taper relief -- if your annual exemption has already been used, it may be worth deferring the disposal of assets that attract only non-business-asset taper relief until after 5 April 2001. If the asset was held at 17 March 1998, a further year of taper relief will accrue on disposal.
* "Bed and breakfasting" is no longer effective, but it is possible to "bed and spouse" (where your spouse buys back the shares and so keeps them in the family), or to "bed and ISA" (where the shares are bought back through an ISA).
Plan for 2001/2002
* Share investments across the family -- everyone has an tax-free allowance of 4,385 [pounds sterling]. But if you transfer an investment to your children, the income can be taxed on you if it exceeds 100 [pounds sterling] a year. That doesn't apply to the capital gains tax exemption (7,200 [pounds sterling]), which children can also use.
* Transfer investments to your spouse if they are not working. If one spouse is earning and the other one isn't, any tax deducted at source on income within the personal allowance may be claimed back (although not on dividend income). The starting rate of tax on savings income is 10 per cent, so this is worthwhile for higher rate taxpayers. Using a non-working spouse's allowances can save 1,700 [pounds sterling] a year.
* Employ your spouse in the family business or make them a partner. This allows income that would be taxed at 40 per cent to flow to someone who is taxed at a lower rate.
These points are merely a selection of opportunities that could improve your financial health not only for this year but for the future. Alternatively, of course, you could return to the treadmill and nicotine patches ...
Trevor James is a partner and Graham Cowie is a senior manager at PricewaterhouseCoopers
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|Author:||Constable, Trevor James; Cowie, Graham|
|Publication:||Financial Management (UK)|
|Article Type:||Brief Article|
|Date:||Jan 1, 2001|
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