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.