Year-end tax planning is as important as ever and to help you with your preparation we thought it would be useful to include a summary of some of the key areas to consider before 5 April 2012:

Capital Allowances

The annual allowance will reduce from £100,000 to £25,000 from 6 April 2012. Partners and sole traders should therefore consider utilising their annual investment allowance prior to 5 April 2012. Care should be taken with accounting periods that span this date as the allowances may be prorated.

Pensions

• For the 2011/12 tax year individuals can contribute up to £50,000 into their pension.
• Those who have not contributed the full £50,000 in any of the previous three years may be able to pay increased amounts prior to 5 April 2012.
• Individuals with no earning can contribute up to £2,880 into pension funds, and the government will gross this annual up to £ 3,600. This can be effective for children and spouses.
• The lifetime allowance is being reduced to £1.5 million from £1.8 million from 6 April 2012. Individuals should review if any actions needs to be taken before 5 April 2012

The Family Unit

• Family businesses should consider paying all members who are involved in the business an income so they can use their personal allowances. Where a spouse is an employee, the optimum level for 2011/12 is approximately £7,000, which also avoids National Insurance but optimises income for State Pension purposes.
• Where there is a partnership or the spouse is a shareholder in the family company, there is more scope to spread the tax burden between the couple.
• At an income level where one spouse is already receiving income in excess of £150,000, there will be a tax saving by transferring outright (or perhaps into joint names) investments to the other spouse whose income is below that level.
• More interesting are shares in family trading companies. Provided an individual holds at least 5% of the shares in such a company and is an employee, a married couple can potentially double up on Entrepreneur's Relief for capital gains tax purposes thus securing up to £20 million of gains being taxed at only 10% whilst also gaining income tax advantages.
• Children also have their own personal allowances and, where there are family discretionary trusts, consideration should be given to distributions to mop up personal allowances and lower bands of tax.

Tax Shelters

• This typically involves Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT). Both are Government-sponsored arrangements designed to reward investors who risk capital in qualifying companies.
• EISs provide income tax relief at the rate of 30% on equity investments up to £500,000 per tax year (£1 million from 6 April 2012) in eligible companies. The relief can also be carried back one year. To retain relief, the shares need to be held for three years and if this is the case, can be sold free of capital gains tax. It is also possible to shelter capital gains where an investment is made into EIS shares issued one year before and 3 years after any gain has arisen.
• VCT's offer relief at 30% on investments in them up to £200,000 per tax year. Dividends are tax free as are any gains on the sale of the qualifying VCT shares.
• With the top rate of 50% applying, the attraction of investing in an ISA (Individual Savings Account) is increased. An individual can invest £10,680 for the tax year 2011/12 securing tax free income and gains within the plan.

A 60% Tax Rate?

Where an individual's income exceeds £100,000, personal allowances are gradually phased out with the result that once income reaches £114,950, no personal allowances are due. The timing of exercising share options or realising income gains on investments therefore needs careful consideration where income is around this level. Income within this band is effectively taxed at a rate of up to 60% and therefore consideration should also be given to paying increased pension contributions, Gift Aid donations or accelerating qualifying interest payments to avoid this penal tax rate. Where this is an ongoing problem investments can usually be made via investment bonds to defer the tax liability.

Capital Gains Tax

• All individuals have an annual gains exemption up to £10,600. In arriving at this figure, losses for the current year must be deducted from gains before the exemption is applied. Married couples should therefore consider transferring assets between them prior to sale in order to potentially double this exemption.
• When selling shares to step up base cost or to generate gains that will be covered by losses or the annual exemption, the anti-avoidance rules to counter 'bed and breakfasting' (the repurchase of shares within 30 days) should be remembered — although there are ways to reacquire those shares outside these rules.
• It is proposed from 6 April 2012 that foreign currency held in bank accounts will be an exempt asset for capital gains tax purposes. It may be worth considering crystalising losses before the 6 April or deferring gains until after.

Inheritance Tax

The now familiar £3,000 annual exemption for what gifts remains available to all individuals and can be carried forward one year if not utilised. There is also an unlimited small gifts exemption of £250 per beneficiary each year.

In addition, the exemption for regular gifts out of income is one which should be usefully reviewed at the end of each tax year. Payments into life policies for the benefit of others can be a useful way of utilising this exemption. Where pure cash gifts are involved, evidence should be kept of the intention of the donor to maintain a regular pattern of gifts and also to confirm that the amounts so given are well within the individual's surplus income for the relevant year.

Key contact:

Martin Taylor
E mtaylor@hwfisher.co.uk