Spring clean your finances

There are many ways to ride the Inland Revenue roller-coaster. The gaps are closing and there are useful tips for the diligent.

Friday 25 February 2000 01:00

Now that both the tax-year end and the Budget are drawing near, it's time to consider steps that will reduce your tax bill and minimise the effects that the Chancellor's Budget proposals may have on your financial position, at present and in the future.

Now that both the tax-year end and the Budget are drawing near, it's time to consider steps that will reduce your tax bill and minimise the effects that the Chancellor's Budget proposals may have on your financial position, at present and in the future.

There are a number of tax-planning opportunities available before 6 April 2000, along with certain tax-saving strategies for the coming year. This is usually best done well in advance, since the 21 March Budget can, without warning, put an immediate end to the well-worn, or even creative, tax-planning strategies.

In some cases, changes announced can end up having a retrospective effect. Delaying action can prove costly. But changes can be announced which frustrate strategic planning, and can mean that no action would have actually proven more efficient. Such situations are rare, but it does mean that advice should be sought before significant planning is put in place.

Everyone is entitled to receive income up to the amount of their personal allowances, without paying any income tax. And each individual is then entitled to pay income tax at reduced rates of 10 per cent and 23% for the current year (1999/2000), on the first part of their income. For a married couple, the first planning tactic is to ensure that the personal tax allowances and lower rate tax bands are fully utilised by each spouse. If one spouse is paying tax at the higher rate while the other has little or no income, a transfer between them of income-producing capital can result in a tax saving of nearly £6,700, if the personal allowance is unused.

Where a family business is involved, a similar result may be achieved by bringing the non-working spouse into the business, either as a partner in an unincorporated business, or as an employee, entitled to a salary. In either case, the spouse should really play an active part in the business.

Despite the increases seen in recent years in the taxable benefit attaching to the provision of a company car for private use, many employees still see this as a valuable perk. Yet many are unaware that a little careful housekeeping can significantly reduce the size of that benefit.

Where business mileage in the year reaches 2,500 or 18,000, the taxable benefit is reduced from 35% of the list price of the car, down to 25% and 15% respectively - which for a 40% taxpayer will produce a saving of £1,600 in tax on a car, with a list price of, say, £20,000. Timing business trips to take place before the tax year ends can be well worthwhile.

The taxable benefit of private fuel provided for use with the car has also risen sharply in recent years with the result that employees should give careful consideration to whether this benefit still makes sense. With limited private fuel use, it may prove cheaper for the employee to reimburse the cost to the employer rather than pay the tax on the full year's benefit. Many employees are now choosing to exchange their company car and car fuel for a car allowance from the employer, which the employee uses to buy their own car. In some cases the employer can arrange discounted car purchase schemes. With the basis of the tax charge on company cars set to change, all employees should still consider this option.

If an employee uses their own mobile phone for business and claims reimbursement of anything more than just the cost of the specific business calls, a tax and NIC charge may arise. Employees in this position should discuss with their employers whether provision of a mobile phone by the employer - which is now exempt from tax and NIC - would be a cheaper option.

Besides the personal allowance for income tax purposes, all individuals are also entitled to an annual exemption from capital gains tax. Gains made before 6 April 2000, on the sale of such things as shares or a second home, will therefore not give rise to a tax charge so long as the gain is below £7,100. If this annual exemption is not used it will be wasted. So if large gains are anticipated in future years it is well worth considering whether some of the gain can be crystallised this year to avoid wasting the exemption.

If gains above the annual exemption are expected, consideration should be given to any reliefs that may be available. These include retirement relief, relief upon reinvestment of the proceeds in qualifying shares, and the possibility of generating capital losses to offset the gains, for example by selling shares that have dropped in value. Certain unused capital losses from earlier years may also be available to reduce gains arising in the current year.

In the past, the effects of inflation were taken into account in calculating capital gains by giving an "indexation allowance". This allowance has now been replaced by a system of "taper relief", whereby only a proportion of the calculated gain is actually brought into charge to tax.

The amount of taper relief depends upon the length of ownership of the item sold, and also upon whether it is deemed to be a "business" or "non-business" asset. The difference in tax terms can be quite significant. So it's essential to consider whether the definition of "business asset" is satisfied and, if not, what changes can be made.

This is particularly important, for example, where shareholdings are concerned, where the purchase of just a few more shares could make the difference between 60% of the eventual gain being chargeable to tax, compared with 25%.

Planning for death is something that nobody relishes. Yet it is, ironically, a task which can prove more beneficial in terms of tax saving than any other form of tax planning. With the inheritance tax threshold, above which inheritance tax is payable, standing at £231,000 this year, many people will leave an unexpected, and in some cases unnecessary, inheritance tax bill when they die.

Gifting assets during an individual's lifetime can reduce the tax chargeable by half, or even eliminate it. That doesn't mean that you have to give it all away.

Estate planning, involving the proper drafting of a will combined with lifetime giving of specified assets, can not only produce significant tax savings, but will also reduce administrative burdens upon the surviving relatives as well as eliminating any uncertainties that may otherwise arise regarding a deceased's intentions. What's more, by putting arrangements in place before 6 April 2000, an additional £6,000 can be given away tax free through utilisation of both this year's and last year's annual exemptions.

With life expectancy continuing to grow, adequate pension provision continues to be high on the list of many people's priorities. The amount which an individual can contribute to a pension scheme is limited by their earnings and, in many cases, contributions must be made by the end of the tax year if reliefs are not to be wasted.

While it is still possible for a certain amount of utilised relief from earlier years to be "carried forward", plans for the introduction of stakeholder pensions include suggestions to abolish this. Although the full detail is still not known, it may mean that missing the 6 April contribution deadline this year may result in unused reliefs being lost entirely.

The Government has been keen to publicise the success of its investment vehicle Individual Savings Accounts or ISAs, brought in to replace both Tessas and Peps. Interest, dividends and bonuses paid on investments held in ISAs are exempt from income tax while capital growth is also exempt from capital gains tax.

Limits apply to the amounts that may be invested each year into ISAs, and it is well worth considering whether setting up an ISA, or topping up an existing one, by 6 April 2000, would be beneficial.

The writer is a tax partner with Pannell Kerr Forster

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