Act in haste and don't repent
The end of the tax year is looming. There's money to be saved, says Steve Lodge
Sunday 24 March 1996
But the idea that we can save heaps of tax by spurring ourselves into action before the end of the financial year on 5 April is really a bit of myth invented by the financial services industry to sell its wares.
"The man in the street should not get too worried," says David Norman, senior manager at KPMG personal financial services. "But for wealthier people it's a real deadline."
Most tax-saving is in fact about good financial housekeeping which people - wealthy or otherwise - should be doing throughout the year.
There is no time for further delay, however. April 5, while it is the end of the tax year, is also Good Friday - a bank holiday. So, for example, 4 April is the last day to sell shares if you are looking to mop up this year's capital gains tax allowance.
It is also stupid for company car drivers to leave until the last moment the discovery they are 500 miles short of the 2,500 or 18,000 mileage thresholds which cut the tax charge on your car. And some PEP firms also have early deadlines. For example, this Friday (29 March) is the last day to buy a Schroder PEP (Schroders being a leading brand) and still benefit from an escape clause which offers short-term protection against a stock market crash. Schroders offers a seven-day cooling-off period which allows you to get your original money back if you change your mind. Say you bought on Friday and then the stock market crashed. You could cancel and then buy another PEP at the new lower price before the tax year ends. Buy from Schroders after Friday - in the last week of the tax year - and you will not benefit from this cooling-off period.
For tax-savers, this year there are two special factors to consider. One, we could have a Labour government within the next year, which could threaten some tax allowances. Second is that the stock market is close to an all-time high and could be set for a fall, meaning PEP investors, for example, might want to tread carefully.
Here then are some key tax-saving tips:
There is a lot of waffle spouted about topping up pension arrangements before the end-of-the-tax-year. The reality is that few people contribute anywhere near the limits on which you get tax relief, and unused reliefs can in many cases effectively be carried forward.
One important exception, however, is people in pension schemes run by their employer. They cannot carry forward tax-relief. And if you make what are called additional voluntary contributions, normally you will also benefit from a subsidy from your employer.
Company car drivers can reduce their tax charge by one-third in any year if you do 2,500 business miles, and two-thirds if you do 18,000 miles. Driving into work is not considered business. But if you can do sufficient client visits, for example, the tax-saving can easily work out at pounds 500 or more. You should keep a record of these journeys, say accountants. Also, if your employer pays for all petrol but you don't do many miles privately, it may save you tax to repay your employer for this fuel to avoid paying the standard fuel benefit tax charge.
If you had any untaxed income or capital gains in the last tax year - 1994-95 - then unless you report them to the Revenue by the end of this tax year you risk a fine.
Capital gains tax may seem the least of your worries. Currently, it is not particularly onerous: you can make pounds 6,000 of tax-free gains a year; these are normally only crystallised when you sell investments; only gains over inflation count; and you can pare down your liability by offsetting capital losses against gains.
But the Revenue ruled last week that many building society windfalls are subject to CGT, and an incoming Labour government could increase the bite of CGT even during the next year.
A small number of savers with Cheltenham & Gloucester could face capital gains tax for the first time in their lives this year as a result of windfall payments from the society's takeover by Lloyds Bank. Profits from privatisation shares could further crowd your tax-free allowance.
Increasingly, therefore, it is likely to make sense to consider taking full advantage of the tax-free allowance each year. You do not have to get rid of shares or other investments to do this. Bed-and-breakfasting is a way of crystallising a gain or loss at relatively low cost without giving up the investment. Alternatively, bed-and-Pepping is a way of crystallising any gain or loss while at the same transferring the investment into a PEP, so making future gains tax-free.
While the stockmarket is at an all-time high and is vulnerable to a setback, there are a number of ways of taking up your PEP allowance this year but reducing the risks. Schroders cooling-off period escape clause will only cover you for a week. But some PEPs will also allow you to hold cash for longer while waiting for the stockmarket to fall to a cheaper level. Alternatively, you can put pounds 1,500 of your PEP money into unit or investment trusts investing in non-European markets - such as Japan - which may be less in danger of a crash. Finally, bear in mind that the stockmarket should be a long-term home for savings. Even if there is a crash, in 10 years' time you should still come out better from a PEP than from pretty much any other mainstream savings plan.
Most people may not automatically connect giving away money with saving tax. But the expectation that a Labour government would clamp down on inheritance tax should prompt older people to review how they want their accumulated wealth to trickle down the generations. One attractive tax break is that you can give away pounds 3,000 a year free of all inheritance tax liability, however soon afterwards you should die.
This allowance can be carried forward for one year only, so if you didn't use it in 1994-95 you only have until 5 April to take it up. In addition, to use it you will also have to use this tax year's pounds 3,000 allowance. It is also worth investigating what are called normal expenditure rules, which can allow much bigger gifts that wholly escape tax.
Housekeeping-wise, probably one of the biggest tax losses is from not bothering to reclaim tax deducted from building society savings. The Revenue reckons as much as pounds 500m is waiting to be claimed by millions of non-taxpayers and people currently in the 20 per cent tax band. Couples in different tax bands should also consider transferring savings to the partner paying less tax.
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