Make it a joyful new year's eve
As the year's tax threshold looms, it's time to go into a darkened room and carry out some quick money-saving manoeuvres
Saturday 30 March 2002
This is potentially the most valuable weekend of the year – provided you are willing to consign yourself to a darkened room with a flask of black coffee and some soothing music. The taxman's new year's eve falls next Friday, 5 April, which means it is your last day for making changes in your finances that will count towards the 2001-2 tax year tally.
"It can really make a big difference," said Jason Butler of Bloomsbury Financial Planning. "I've just saved someone £500,000, and he's bought an Aston Martin with that money – which might otherwise have gone to the Inland Revenue."
Despite a clampdown in recent years, the self-employed still have more scope for lightening their tax burden than those of us whose tax is deducted at source by our employers. This is the week for sole traders to stock up on stationery, buy some office gadgets, possibly upgrade that laptop and buy in as much raw material as possible to get that early-April date on it. Conversely, it is a time to delay invoices and anything that might produce untimely income.
Happily, many companies delay paying dividends until the end of April, and bank deposit interest is often conveniently held back until then as well.
The self-employed and those with company cars should pile up as much mileage as they can next week, before the rules change and cars become taxed on their propensity to pollute. That also signals a possible switch to a more tax-efficient car when next Saturday dawns. Otherwise, your best chance of denying the tax collectors as much as possible lies in investing. This is an ideal time to tidy up your portfolios. By throwing out the complete losers you can register losses that can be set against capital gains.
Only those who have spent the past few months on a remote island will be unaware that next Friday is the deadline for registering this year's individual savings account (Isa) allowance of up to £7,000. Any capital growth, interest or dividends flowing from this sum will be tax-free as long as it is held in the Isa. But it cannot be retrospective: if you have not filled in the forms by Friday, your 2001-2 Isa allowance will be lost. The most straightforward version of this is a cash mini-Isa, but as the "mini" indicates you can only put in £3,000. Another £1,000 can go into a life insurance policy.
Although the management fees you pay will be higher, you can shelter the full £7,000 in a self-select Isa, which can stay in cash for a year or more before you have to commit yourself to a specific investment. In the present uncertain climate, this may be more attractive than putting the whole £7,000 into the stock market. If you want to invest in shares or bonds on a more cautious basis, consider a monthly instalment plan.
A Tessa-only Isa can only include the capital from a matured Tessa. The transfer must take place within six months of the maturity date. It can be held in addition to other Isas. Alternatively, capital from a matured Tessa can be transferred into the cash component of a maxi-Isa or a cash mini-Isa on top of the usual limit.
Consult a financial adviser or phone your bank or insurance company – or you can fill in the forms which are liberally printed in this weekend's newspapers. You have to be 18 to invest the full £7,000, but 16-year-olds can open a cash mini-Isa – as long as the money does not come from their parents. If you have cash left over after using your Isa allowance, the next best haven you can use is your pension.
Everyone has an annual pension contribution ceiling as a percentage of income which rises as you get older. If your regular contributions have not taken you up to your ceiling, then you can add more before Friday night. It might, though, be a little late to get through the paperwork now, particularly for your employer's occupational scheme.
There are two other types of investment that are encouraged with a little help from the Inland Revenue. The catch is that they exist because the Government wants money to flow into business ideas that might not otherwise receive backing because they are risky. So expect to lose all the money you put in. Any profit is a bonus.
The first is the Enterprise Investment Scheme (EIS), where investors can obtain 20 per cent tax relief on the cost of shares in a qualifying unquoted company. The main qualification is that it must be trading and cannot be a pure property business. The investment is limited to £150,000 a year and is subject to several conditions. On the eventual sale, any profit is tax-free although relief may be given for losses. An investment in EIS shares may also qualify for deferral of Capital Gains Tax on realised gains, and this is not subject to the £150,000 limit.
Even more exotic are Venture Capital Trusts (VCTs), in which investors can collect 20 per cent tax relief on up to £100,000 of the amount subscribed by investing in a spread of young, unquoted companies through a VCT. The qualifying conditions and tax benefits for IT and CGT are similar to those for the EIS.
In addition, dividend income is tax-free, although tax credits cannot be paid. The enforced spread of investments should make VCTs less risky than EISs, but it does mean putting your money in the hands of a manager and this has proved unpopular – especially as the young companies were often in the now-derided hi-tech sector.
Finally, if you have squirrelled away all the tax you can, spare a thought for others and save even more. Giving quoted stocks and shares has become one of the most tax- effective ways of giving to charity. Such gifts have always been free of CGT and the value of shares gifted can now be offset against the donor's taxable income too. The Charities Aid Foundation has CAF Nominees Ltd, which sells shares it is given and pays the proceeds into a charitable trust or CharityCard account in the donor's name. The donor can spread the value of the shares among any number of charities.
But charity begins at home, and transferring shares and other assets to a partner who earns less than you do can also help you cut your income tax bill now as well as your CGT bill if you sell an asset later for a gain.
David Clowes will earn £60,000 this tax year but he will not pay the taxman a penny. Mr Clowes, 54, left, who runs the London Keyholding Company, has used every tax shelter he can lay his hands on to stay out of the tax collector's hands.
He has used his full pension, CGT and Isa allowances, and transferred as much pension contribution as possible to his wife, Gillian, 43, an administrator for an interior decorating company.
But the biggest saving has been a film finance scheme Mr Clowes has been put into by his adviser, Bloomsbury Financial Planning, a sale-and-leaseback operation enabling him to defer for 15 years the capital gains he made from selling a business last September.
"The Inland Revenue is going to pay me," says Mr Clowes.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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