What a waste of money

It is possible to juggle assets to make a tax saving - up to pounds 2,0 50 in some circumstances

NO ONE likes the idea of giving money to the Inland Revenue. Yet it is estimated that this year, taxpayers will dispense with a staggering pounds 5.5bn in unnecessary taxation - equivalent to 3p off the basic rate.

Research by Mintel, the market analysts, for IFA Promotion suggests that pounds 860m could be saved by putting existing investments into personal equity plans. In addition, pounds 300m could be sheltered from capital gains tax by couples making use of their partner's tax allowances.

So what specifically needs to be done? Individual income tax allowances for 1995-96 must be used by 5 April if they are not to be lost. These allowances are: pounds 3,525 for those aged under 65, pounds 4,630 (ages 65-74), and pounds 4,800 (over 74). Income of pounds 3,200 can be received at a 20 per cent tax rate and up to pounds 21,100 at 25 per cent tax for 1995-96.

It is possible to juggle income-producing assets to make a tax saving, the most stark example being where one spouse is a 40 per cent taxpayer and the other is a non-taxpayer. In such an extreme scenario it is possible to save tax of pounds 2,050 if the full personal allowance and the 20 per cent tax band is used. But the sums involved must be substantial.

It is also important to weigh up factors other than just saving tax when considering whether to transfer assets from one spouse to the other. These include a realistic assessment of the state of the marriage and who will inherit the money if one person dies.

An alternative to outright transfer of assets would be to open a joint bank account or transfer assets to joint ownership. Here, there is a statutory presumption that income is treated in equal shares even if all the capital came from one partner.

Making transfers not only enables use to be made of both personal allowances and lower rate tax bands but may also enable the doubling-up of tax-free investments such as PEPs and Tax-Exempt Special Savings Accounts.

The limits on investments in a PEP apply for the fiscal year, which means the maximum (pounds 6,000 in a general PEP and pounds 3,000 in a single PEP) can be invested towards the end of one tax year and as much again from 6 April onwards. Up to pounds 18,000 could therefore be invested in the 1996 calendar year or pounds 36,000 for a married couple.

Richard Rees Pufley, a partner in Ernst & Young's private client services department, maintains that there is added urgency for tax planning with a general election looming. "The area where the Conservative and Labour policies differ most significantly is with regard to capital taxes. The Chancellor has indicated that it remains the Conservatives' longer-term intention to abolish inheritance tax and capital gains tax. In contrast, the Labour party has stated in its policy documents not only a commitment to retaining these taxes but also a tightening of some of the reliefs and exemptions."

Capital gains tax liability can be minimised by adopting a number of strategies. For example, it may be that an asset sale can be deferred until after 5 April 1996, which will defer the payment date of the tax by 12 months. If part of the asset is sold in one tax year and part in the next, two exemptions against capital gains tax can be made.

The capital gains tax allowance for 1995-96 is pounds 6,000 and pounds 6,300 for 1996-97 which means that pounds 24,600 of gains could be realised tax-free in the 1996 calendar year using both spouses' allowances. If you do not want to get rid of an investment but still make use of your allowance, bed- and-breakfasting is another option. This involves selling and then immediately buying back, so crystallising the liability for tax purposes. With bed- and-breakfasting, stockbrokers will do special deals. Some may allow you to bed-and-Pep, repurchasing the shares in the shelter of a personal equity plan.

Finally, remember that 5 April is Good Friday, so you must sell shares before then. If substantial gains to a portfolio are expected and there are investments which show a loss, it may be worth selling or bed-and- breakfasting to create a loss for use against other gains.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Mortgage Advisor - OTE £95,000

£40000 - £95000 per annum: Recruitment Genius: This is an exciting opportunity...

SThree: Trainee Recruitment Consultant

competitive: SThree: Are you passionate about sales?Do you have a keen interes...

Recruitment Genius: Loan Adviser - OTE £30,000

£17000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Day In a Page

Isis in Syria: Influential tribal leaders hold secret talks with Western powers and Gulf states over possibility of mobilising against militants

Tribal gathering

Influential clans in Syria have held secret talks with Western powers and Gulf states over the possibility of mobilising against Isis. But they are determined not to be pitted against each other
Gaza, a year on from Operation Protective Edge: A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians

Gaza, a year on from Operation Protective Edge

A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians
Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously

Illnesses, car crashes and suicides

Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously
10 best trays

Get carried away with 10 best trays

Serve with ceremony on a tray chic carrier
Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

EU 'family' needs to forgive rather than punish an impoverished state

An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

Gaza, a year on from Operation Protective Edge

The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
How to survive electrical storms: What are the chances of being hit by lightning?

Heavy weather

What are the chances of being hit by lightning?
World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

World Bodypainting Festival 2015

Bizarre and brilliant photos celebrate 'the body as art'
alt-j: A private jet, a Mercury Prize and Latitude headliners

Don't call us nerds

Craig Mclean meets alt-j - the math-folk act who are flying high
How to find gold: The Californian badlands, digging out crevasses and sifting sludge

How to find gold

Steve Boggan finds himself in the Californian badlands, digging out crevasses and sifting sludge
Singing accents: From Herman's Hermits and David Bowie to Alesha Dixon

Not born in the USA

Lay off Alesha Dixon: songs sound better in US accents, even our national anthem
10 best balsamic vinegars

10 best balsamic vinegars

Drizzle it over salad, enjoy it with ciabatta, marinate vegetables, or use it to add depth to a sauce - this versatile staple is a cook's best friend
Wimbledon 2015: Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Brief glimpses of the old Venus but Williams sisters' epic wars belong to history

Serena dispatched her elder sister 6-4, 6-3 in eight minutes more than an hour
Greece says 'No': A night of huge celebrations in Athens as voters decisively back Tsipras and his anti-austerity stance in historic referendum

Greece referendum

Greeks say 'No' to austerity and plunge Europe into crisis
Ten years after the 7/7 terror attacks, is Britain an altered state?

7/7 bombings anniversary

Ten years after the terror attacks, is Britain an altered state?