Have a happy new financial year

Here is what you can do now to be better off in 2005/6, says David Prosser
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The Independent Online

Happy New Year. No, the greeting isn't four months out of date. Wednesday is the first day of the 2005/6 financial year - which gives you just two more working days to save money in the current tax year.

Happy New Year. No, the greeting isn't four months out of date. Wednesday is the first day of the 2005/6 financial year - which gives you just two more working days to save money in the current tax year.

IFA Promotion, a lobby group for independent financial advisers, says Britons waste a total of £5.7bn annually on unnecessary tax. David Elms, the chief executive, warns: "The onus is falling on us to manage our own tax affairs, but millions have been slow to pick up on this responsibility."

However, there are several steps you can take on Monday and Tuesday to reduce what you pay the Inland Revenue:

SAVINGS

Individual savings accounts (ISAs) enable anyone over the age of 18 to save and invest £7,000 a year tax free. To get the full £7,000 allowance, you need to open a stocks and shares ISA - you must be prepared to invest for the long term, say five years or more, in order to ride out share price ups and downs

But even if you're risk averse, you can still invest £3,000 in cash ISAs each year. These work like any other bank or building society savings account, with no risk to your capital. But as all the interest you receive is tax free, it makes sense to open a cash ISA if you have any savings in taxable accounts. We list the current best buys on page 17.

City fund managers often make special arrangements such as telephone hotlines to allow savers to open stock market ISAs right up until midnight on 5 April. But try not to leave it until the last minute: with both cash and stock market accounts, if you fail to use this year's allowance, you lose it for good.

Finally, if you have exhausted ISAs, savers qualify for several other tax breaks. Venture capital trusts and National Savings products, for example, both offer tax relief. But never make an investment purely for tax reasons.

PENSIONS

Private pensions work in a similar way to ISAs: although tax relief is available on contributions, there are limits to what you may pay in each year. Once the tax year has ended, a good part of these allowances is gone for good, so try to maximise your pension savings.

Most people are allowed to contribute up to £3,600 to a stakeholder pension each year, the most basic type of individual plan offered by insurers.

After tax relief, this contribution costs a basic-rate taxpayer just £2,808 - £2,160 for a higher-rate taxpayer. Above £3,600, contribution limits depend on your age and the type of private scheme to which you belong.

INCOME TAX

Many married couples pay too much income tax. If one partner is in a higher tax band, they should transfer investments and savings to the partner who pays tax at the lowest rate. These transfers are tax free and could reduce your overall tax bill.

In addition, David Kilshaw, tax partner at accountant KPMG, says: "Check your tax code for 2005/6 - it is important to ensure your coding notice reflects any revision in your benefits package." Your local tax office (in the phonebook under Inland Revenue) can explain how tax codes work.

INHERITANCE TAX

If your estate is worth more than the inheritance tax threshold - which rises to £275,000 next year - advance planning will protect your nest egg for your heirs. Remember that the threshold includes the value of your home.

The easiest way to reduce a potential tax bill is to lower the value of your estate. You can give away up to £3,000 each tax year and make as many gifts as you like of no more than £250. Another option is to take out life insurance that your heirs could use to pay a tax bill.

Most insurers can offer you a simple application form that will enable the policy to be written in trust, keeping the proceeds out of your estate for tax purposes.

CAPITAL GAINS

David Kilshaw says: "You should consider using your capital gains tax annual exemption of £8,200 before the end of the tax year - married couples should remember to use both partners' annual exemption."

CGT is payable at 40 per cent on profits of more than a certain amount each year - the allowance rises to £8,500 on Wednesday. If you plan to cash in an investment, and you know this might be a problem, it may be worth selling in two slices, either side of the tax year end.

This will use your allowance in both this year and next. Also consider claiming losses on any investments that have become worthless, to reduce your total profits. But don't take decisions about the timing of the disposal of any investment purely on the basis of a tax problem.

PRE-OWNED ASSETS

Some people have tried to plan for inheritance tax by giving away their homes to family.

The bad news is that new tax rules to be introduced on Wednesday could leave those who made such gifts before 6 March facing a tax bill if they are still living in the property.

Chris Whitehouse, of the Society of Trust and Estate Practitioners, says the rules have been introduced in a rush. "Taxpayers have been left in limbo," he warns. "They need to take professional advice."

In the worst case, someone living in a home they have given away could have to pay income tax on the theoretical value of the commercial rent they would normally have to pay to live in such a property. Or they may be able to take back the property, leaving them with the original inheritance tax problem.

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