Year End Tax Planning – Can you afford not to plan?

Regular Savings	Capital Gains Tax Strategies
Pensions 'A-Day'	Business Tax Strategies
Efficient regular saving	Gift Strategies
Income Tax Strategies	Tax Shelters

Regular Savings

Many focus savings is for retirement with the aim to fund a reasonable standard of living at retirement.

Tax reliefs have encouraged saving through various schemes such as pension plans - with tax relief at up to 40% on your own contributions. However, contributions to tax-advantaged plans are limited and you need to be aware that:

• 2005/06 contributions need to be made by 5 April 2006
  
• retirement annuity premiums paid up to 5 April 2006 can be carried back to top up 2004/05 contributions, and use any unused relief for the previous six years

Efficient regular saving

Small, regular amounts can be saved in Individual Savings Accounts (ISAs). With a limit of £7,000 on annual savings, a couple could save £70,000 by the time the current limits next come under review in 2010. You have until 5 April 2006 to make your 2005/06 ISA investment. Gains and most income in an ISA are tax-free.

Regular sums can also be invested in National Savings (some products offer a tax-free return, which is particularly attractive to 40% taxpayers), banks and building societies.

Gift Aid donations

Ensure that charitable gifts are covered by Gift Aid and record them so that we can include your claim for higher rate tax relief, if you are a 40% tax payer, on your tax return.

Pensions 'A-Day'

You should also be aware on 6 April 2006 many of the current restrictions on pension savings are removed. If you are considering setting aside a substantial sum of money for investment on or after 6 April 2006, make sure you invest it somewhere where it can be working for you in the meantime.

In 2006/07, you can invest as much as you want, with tax relief up to your total earnings or £215,000 (whichever is the lesser) in your pension plan.

The general rule for pension plans is that the savings are invested in a largely tax-free environment - with capital gains and income largely escaping tax. There is therefore tax relief on your investment and, for the most part, income and gains accrue tax-free.

Have you considered a property Self Invested Pension Plan (SIPP) for your commercial property?

If you need further advise or would like to discuss this further then please contact us.

Income Tax Strategies

Reconsider your company car and fuel options - you need to consider the tax liability on your company car and fuel provided for private travel and the emissions of your next car, and running your own car and claiming business mileage. Either alternative may save you a significant sum of income tax.

For the over-65s, keep your income below the limit at which the age allowance is reduced - the higher allowances are scaled back if income exceeds £19,500. Consider income in ISAs and some National Savings products, which do not count as part of income for this purpose.

Watch your contributions - with the no-limit 1% national insurance contributions charge it is impossible to say how much the maximum NI contribution is this year, but if you are paying Class 1 contributions in more than one employment, or a combination of Class 1, 2 and 4 contributions, you might overpay. Refunds of excess contributions are not automatic - a claim must be made if you believe you might have overpaid. In some cases deferment can be claimed.

Capital Gains Tax Strategies

Make use of annual exemptions and defer gains - Split sales across the end of the tax year and make use of two years' annual exemption. Make an outright gift to your spouse, who can make use of their exemption, too.

Make a main residence election for your second home - subject to time limits, an election to have your second home treated for tax purposes as your main residence for as little as two weeks can add valuable CGT reliefs when you come to sell it, at a cost of what should be a very small loss of relief on your first home.

Use business losses against capital gains - if you have business losses and assets with gains, you might realise the gains now, offsetting your business losses to minimise your tax liability.

Realise capital losses to offset current year gains - avoid matching problems by re-purchasing through an ISA or having your spouse buy what would otherwise be the matching shares.

Business Tax Strategies

Take a dividend instead of a bonus from your company - saving both employer and employee NICs.

Incorporate your business - despite the changes in 2004 you can still take advantage of the low rates of corporation tax and the ability to extract profit through dividends.

Ensure business borrowings will attract tax relief - funds borrowed for business purposes obtain full tax relief; your house mortgage may not.

Reduce the possibility of a tax bill when you leave your business - by discussing your plans with us and drawing up a tax-minimisation exit strategy and taking advantage of various reliefs available.

Gift Strategies – Have you used your annual exemption amount of £3,000?

Make sensible gifts - never give away what you cannot afford, but if IHT is a concern, a sensible gift strategy can ensure that you help your family in your lifetime and reduce the IHT payable on your death.

Review your estate plan and Will – It is advisable to review your Will more frequently to take advantage of relevant changes in tax law.

Include a nil-rate discretionary trust in your Will - or make a discretionary Will.

Tax Shelters *

Invest in a tax shelter - capital gains tax can be deferred by investment in Enterprise Investment Scheme shares, and investment in these plus Venture Capital Trusts rank for income tax relief (subject to limits). The Film Finance Schemes also offers tax deferral.

Enterprise Investment Scheme *

Income tax and CGT reliefs are available for investment in qualifying shares. Investors may be given income tax relief at 20% on their investments of up to £200,000 a year provided that the shares are not disposed of within three years. Gains on the disposal of EIS shares are exempt unless the income tax relief is withdrawn.

The CGT exemption may be restricted if an investor does not get full income tax relief on the subscription for EIS shares. Losses on the disposal of EIS shares are allowable. The amount of the capital loss is restricted by the amount of the EIS income tax relief still attributable to the shares disposed of. A capital loss arising on the disposal of EIS shares can be set against income.

CGT deferral

• Gains arising on disposals of any assets can be deferred against subscriptions for shares in any EIS company.
  
  
• Shares do not have to have income tax relief attributable to them in order to qualify for deferral relief.
  
  
• The gain will become chargeable in the tax year when the subscription shares are disposed of.
  
  
• There is no upper limit on the amount of deferral relief available to an individual although there is a limit on investment in a single company or group of companies.

Venture Capital Trusts *

Venture Capital Trusts (VCTs) are complementary to the Enterprise Investment Scheme (EIS), in that both are designed to encourage private individuals to invest in smaller high-risk unquoted trading companies affected by the equity gap. While the more famous EIS requires an investment to be made directly into the shares of the company, VCTs operate by indirect investment through a mediated fund. In effect they are very like the investment trusts that are obtainable on the stock exchange, albeit in a high-risk environment.

Reliefs Available to Investors

Income tax relief at 40% is available on subscriptions for VCT shares up to a limit per tax year of £200,000. This is to be reviewed by 6 April 2006.

Investors are exempt from tax on any dividends received from a VCT although the credits are not repayable.

Capital gains arising on disposal of the shares are also exempt . There is no relief for any capital losses.

Film Tax Relief *

In order to encourage investment into the British film industry, 100% immediate income tax relief is available for qualifying expenditure on the production or acquisition of a master version of a film meeting the relevant certification requirements.

This tax break has led to the extensive promotion of film schemes, whereby individuals looking to shelter higher rate income tax liabilities can enter into partnerships set up in order to develop or promote qualifying British films.

Most such partnerships involve the purchase and subsequent leasing back of films to the producer, with the latter's lease obligations underwritten by a bank. This gives rise to an immediate tax rebate, which is then gradually clawed back over the lifetime of the lease. Hence, the arrangement operates rather like a loan from the Inland Revenue, repayable over 15 years.


* These notes are intended to give an initial introduction to the tax incentives linked to certain investments. You should always take further advice from a qualified financial advisor before deciding to invest / refrain from investing in such products.

If you have any queries about this article contact Steve Cook, Tax Partner, steve@nunn-hayward.com