In the run-up to the end of the 2009/10 tax year, now is the time to start making sure that your tax affairs are in the best of health. Follow our check list to see what you should be considering.
Unused Tax Allowances
If your spouse has any unused tax allowances or pays tax at a lower rate, it makes sense to utilise this. If you are a higher rate taxpayer you must declare savings interest and dividend income to HMRC and extra tax is deducted. But if you give your savings to your spouse then they would pay less tax, boosting your income. Of course, you must trust your spouse. Don’t hold the money in joint names because HMRC will assume you each earn half the interest.
Individual Savings Account (ISA) allowance
During the 2009/10 tax year, make sure you fully use your £7,200 ISA allowance (or £10,200 for those over 50). Up to £3,600 (£5,100 for those over 50) of this can be invested in cash or, if you wish, the full amount can be invested into stocks and shares, the capital gains from which are tax-free. There is no capital gains tax payable when you sell shares or units held in an ISA.
If you are a pensioner, once your income exceeds £22,900 (2009/10) you will lose some or all of your age-related allowance, as the allowance will be reduced by £1 for every £2 of income above the limit. If you are very close to being affected by a reduction in the age-related allowance you could consider using tax-free savings, such as a cash Individual Savings Account (ISA) and National Savings Certificates. Another option is certain insurance company bonds, which can delay tax payments. The key thing is not to allow tax concerns to dictate your whole investment strategy or you could actually end up with less income.
If you are over 65, donations to charity through Gift Aid can reduce your taxable income to below the level at which you start to lose out on age-related allowances. If you are in a higher tax bracket, you can claim back the difference between the basic and higher rate of income tax on any Gift Aid donations.
Make sure that you take advantage of your pension contributions. When you save in a pension you receive a minimum of 20 per cent relief, whether you pay tax or not, and up to
40 per cent relief (2009/10) if you are a higher rate taxpayer. There is no tax payable on the growth of capital within your pension fund. However, tax credits on UK dividends cannot be reclaimed. You also pay no tax if you die before drawing benefits and 25 per cent of your pension fund is available as a lump sum, free of tax, at retirement.
Capital Gains Tax (CGT) Allowance
Individuals, personal representatives and trustees for disabled people are permitted to make a £10,100 capital gain in the current 2009/10 tax year without paying tax, and you should fully utilise this facility if applicable to your particular situation. Other trustees are permitted to make a £5,050 gain in the current tax year without paying tax. You only pay tax on the excess over the tax-free limit if your gains (profit) exceed your allowance. For this tax year there is a single rate of CGT of 18 per cent irrespective of income for individuals, trustees and personal representatives on taxable gains. If you are a married couple or a registered civil partnership and own assets jointly, you can claim a double allowance of £20,200.
Inheritance tax (IHT)
Gifts are not normally counted as part of your estate for IHT purposes if you live for a further seven years after making them. Known as potentially exempt transfers (PETs), they can reduce your residual estate significantly.
Child trust funds
Use child trust funds (CTFs) or Children’s Bonus Bonds to avoid being taxed on gifts you make to your own children.
Annual investment allowance
If you are a landlord or run your own business, take advantage of the annual investment allowance (AIA) to claim for capital expenditure on items such as tools and computers. You can claim relief on up to £50,000 a year.
Reducing capital gains tax on a rental property
Landlords are normally liable for CGT when they sell a rental property. If it has been your main home at some time in the past, you can claim tax relief for the last three years of ownership. The main residence relief applies to a dwelling house (including a flat, apartment or similar) that has been your only or main residence at some time during ownership. The basic rule is that the fraction of the gain that is exempt is the period of occupation as your main home divided by your total period of ownership. There is an extension of the relief because the period of occupation is ‘inclusive of the last 36 months’. The amount of relief will depend upon which periods you occupied.
The value of investments and the income from them can go down as well as up and you may not get back your original investment. Past performance is not an indication of future performance. Tax benefits may vary as a result of statutory change and their value will depend on individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.