Q. Recently the Prime minister made comments with regards the “morality” of tax avoidance schemes and his intention to legislate against these as quickly as possible. Without being regarded as one of those lacking moral judgment I wish to minimize my tax liabilities could you please provide some advice on how I could go about this?
A. It is becoming increasingly difficult to judge when tax planning becomes anti avoidance as the government continues in its attempts to close loop holes in tax legislation. I provide below some areas which you could safely consider in your attempts to reduce your current levels of taxation.
FOR THOSE IN BUSINESS
People who are sole traders or partners within partnerships or limited liability partnerships (LLPs) should consider incorporating all or part of their business.
Running your business as a limited company (by incorporating) offers a range of tax planning opportunities. The benefits are derived in the main from the additional flexibility in the forms your income can be taken either as salary, dividends or shares.
If you are in business, you could pay a non-earning spouse/partner a salary, on which you will
then attract tax relief. In addition to the salary, you can pay an employer’s contribution to your partner’s personal pension plan. There is no tax or NIC on the premium itself, and it should be an allowable business expense. It is important to note however, that the total value of your partner’s salary, benefits and pension contributions must be justifiable in relation to the work carried out.
Alternatively if you are a sole trader and incorporation is not suitable for commercial reasons then you could share the profits of your business by operating as a partnership. You both need to be genuinely involved as business partners although not necessarily as equal partners
Consideration should also be given to your accounting year end date and whether this is most beneficial to you. Changing the date may release Overlap Relief that is available to you.
Remember it is possible to claim up to a possible 100% tax relief if your business invests in certain qualifying plant and equipment during the current tax year. The 100% relief is allowed up to £25,000.
If you operate your business as a limited company in which you both have shares, you should
consider paying a dividend before 6 April 2013, if the gross income (including the tax credit) will fall into the basic rate band (£42,475 including personal allowance).
You could even gift shares to your spouse or civil partner shortly before paying the dividend, provided you make a genuine transfer of ownership with no conditions attached. It as advisable to leave as much time as possible between the gift and paying the dividend.
In certain circumstances, couples can save tax by switching income from one spouse or
partner to the other. You should aim to use both individuals’ personal allowances (£8105
in 2012/13) and minimize any higher rate tax. You could transfer investment income by switching ownership of the asset that produces it, although there might be capital gains tax (CGT) to pay if you are not married or in a civil partnership.
You could also simply transfer savings into your joint names so that half the income is taxed on each partner.
INDIVUDUAL SAVINGS ACCOUNTS (ISAs)
In the 2012/13 tax year, the maximum you can invest is up to £5640 in a cash ISA and up to £11280 maximum in a stocks and shares ISA. The total permitted investment is limited to £11280. If you do not invest the full amount, the surplus ISA “capacity” cannot be carried forward or transferred.
ISAs are free of UK tax on investment income and capital gains, though, as with other investments, it is not possible to reclaim the tax credits on UK dividends. Remember that 16 and 17 year olds can open a cash ISA, so you may wish to provide funds for young relatives to invest. However, if you give money to your own children, the interest must not exceed £100 a year, otherwise you will pay tax on it.
Children can have tax-free income of up to £68,105 in 2012/13. However, income of more than £100 a year derived from a gift from a living parent is taxed on the parent if the child is less than 18 years old and unmarried. Teenagers can be employed in a parent’s business for a reasonable salary. Where a child is a beneficiary of a discretionary or an accumulation and maintenance trust, the trustees could distribute some income and the child could reclaim some or all of the 40% tax paid on the distribution.
CAPITAL GAINS TAX
Most individuals have an annual CGT exemption, which in 2012/13 makes the first
£10,600 of gains free of tax. Gains above the annual exemption are taxed at 18% unless the
disposal (or part of the disposal) qualifies for Entrepreneurs’ Relief. Entrepreneurs’ Relief is available in respect of gains made on the disposal of all or part of a business, gains made on disposals of assets following the cessation of a business and on the sale of shares by certain individuals who were involved in running the business. Entrepreneurs’ Relief reduces the effective rate of CGT to 10%. However, there is a lifetime limit of £1,000,000 of gains and once this has been used all gains will be taxed at 18%.
As with all tax planning it is essential to obtain professional advice from the outset. Our advisors are available to offer assistance where possible and can be contacted on 01455 852550.
You should also remember that H M Revenue & Customs (HMRC) are becoming increasingly active not only in areas of anti- avoidance but across all aspects of tax compliance. Our Tax Enquiry Fee Protection policy is designed to provide cover against the potential additional accountancy fees incurred during a HMRC enquiry and if you do not have cover in place already information on the service can be found at www.feeprotectiondirect.com or alternatively by calling us on 01455 852570