With the seasonal festivities soon to begin it seems a strange time to start thinking about the end ...
With the seasonal festivities soon to begin it seems a strange time to start thinking about the end of the tax year. Nevertheless, 5 April 2001 will be upon us before we know it and planning measures for the end of the tax year should not be left until the last minute. As always, there is much for an adviser to consider. This article investigates some relevant areas.
Individuals enjoy a personal income tax allowance of £4,385 this tax year. If not fully used by 5 April 2001 all or part of this allowance is lost.
Individuals should ensure, if possible, that they utilise the whole of their personal allowance (including any age related element, currently £5,790 for those aged 65 to 74 and £6,050 for those aged 75 and over).
Where married couples are in different tax bands assets can be transferred to the lower tax paying spouse to ensure that both partners utilise personal allowances and, perhaps, starting and basic rate income tax bands.
Inter-spouse transfers are free of inheritance tax and capital gains tax. They must, however, be made unconditionally and some clients may have a problem with that. Unmarried couples can, of course, also transfer assets with a view to moving income to the more lightly taxed individual but care needs to be taken as such transfers will not be exempt from tax. Grandparents could consider placing cash or investments into trust with a view to utilising their grandchildren's annual personal allowances.
Individuals who qualify for age allowances will find these reduce by £1 for each £2 of income they have in excess of £17,000. Such individuals may be able to take action to reduce their income tax liabilities by opting for tax-free savings. Consideration could also be given to moving assets into non-income producing investments such as single premium investment bonds. If this course of action is adopted the client is currently able to withdraw up to 5% of their initial investment each year, for up to 20 years, without impacting on age allowances at the time of withdrawal.
Capital gains tax (CGT)
The annual exemption from CGT (currently £7,200 for individuals) is also available on a use it or lose it basis. Consequently, clients with investments showing capital gains should consider crystallising gains up to their exemption by 5 April 2001. Whilst "bed and breakfasting" is no longer effective, other strategies producing similar results may be possible. Once again, inter spouse transfers can be made to maximise use of annual exemptions and lower tax rates.
Where clients have used their annual exemption for the current year, they may wish to defer a disposal until 6 April when the annual exemption for tax year 2001/2002 should be available. This also defers the due date of payment of any tax from 31 January 2002 (for a disposal in tax year 2000/2001) to 31 January 2003, and may also result in an extra year's taper relief.
Currently, taper relief on non-business assets that were owned on 16 March 1998 is available at a rate of 5% (rising to 10% from 6 April 2001). Clients with their own businesses, or those who own shares in their employer's company, may enjoy the improved business asset taper relief announced in Budget 2000 and brought into effect by Finance Act 2000. The maximum rate of business asset taper relief available in tax year 2000/01 is 25%, resulting in an effective tax rate of 30% for a higher rate taxpayer.
The corresponding figures for 2001/02 are 50% and 20%. Whilst this is fantastic news for clients in such a position, the rules governing the availability of business asset treatment are extremely complex and almost certain to result in misunderstandings and disappointments for some clients. Full and detailed advice will be required in this seemingly permanently fluid area, yet more changes have just been announced in Gordon Brown's recent pre-Budget report.
Inheritance tax (IHT)
Currently, an individual may give away up to £3,000 plus any number of separate gifts of up to £250 per individual in a tax year without any IHT consequences.
Any unused IHT annual exemption can be carried forward from the previous tax year provided the current year's annual exemption has been fully used.
For married couples who have made no previous gifts, £12,000 could be given away between them completely free of IHT this year. This gift could be made to work harder from an IHT perspective by effecting a single premium whole of life assurance policy with added life cover in trust for children or grandchildren. This could create a substantial IHT free fund on the death of the survivor of a husband and wife.
Not a year goes by without a bit of pre-Budget IHT scaremongering.
Despite all the sinister noises made by the Labour Party in opposition it has done little to IHT since May 1997. It had the disagreement between the Revenue and House of Lords vis a vis Lady Ingram's lease carve out arrangements which resulted in sections 102A and 102B being added to Finance Act 1986.
Other than an annual uprating of the nil rate band the current Government has seemed content not to meddle further. It seems unlikely that any wholesale reform of IHT will take place before the next election and even then probably only after consultation. Nevertheless, any clients who are currently thinking about reducing the IHT liability on their estates, particularly those who are looking to use one of the many packaged IHT mitigation schemes currently available, would be well advised to put their arrangements in place before the Budget just in case the worst does happen.
For savers there was good news in the recent pre-Budget report. The existing annual Isa limit of £7,000
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