Here is our annual round-up of tax planning points which we hope you find useful in the run up to the end of the tax year and the Budget. These are simple suggestions: they are no substitute for detailed advice. Please get in touch with your usual Nunn Hayward contact to find out if these tips are appropriate in your particular circumstances.

Douglas Brown, partner

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Capital Gains Tax (CGT)

Looking to crystallise losses or gains?

The Revenue effectively blocked the practice of selling and repurchasing assets to create GGT gains or losses a few years ago but it is still possible to achieve a similar result. Consider a method known as ‘bed and spouse’, whereby you sell the shares and your spouse buys them back. This allows you to crystallise a loss to set against any gain you have made in the year – or to crystallise a gain and take advantage of available reliefs and allowances to reduce the tax charge. The shares could be transferred back to you at a later date.

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Workplace Issues

Have you made the most of existing NI levels?

From 6 April 2003, employers, employees and the self employed will pay an additional 1% NI – and employees will pay an additional 1% on earnings above the current upper earnings limit. Where possible, consider paying bonuses, benefits and salary now – it is your last chance under the current NI regime. Approved and EMI share options generally remain exempt from NIC so they can be an efficient aspect of total remuneration.

Can you crystallise losses on share options?

A recent case has resulted in enhanced capital gains tax deductions where tax is paid on the exercise of share options. In a number of cases CGT losses result which can be set against current and future gains. In some circumstances those losses may be offset against your income e.g. for losses on shares in an unquoted trading company. There may be amending legislation in the Budget and you may therefore wish to crystallise the losses now.

Does your spouse or another member of the family work in your business as an unpaid assistant?

Providing they do not have another full-time job, pay them a salary to take advantage of their personal allowances and low rates of tax, but remember that salaries must be justified for the work done. Act before the year end to use up the current year’s allowances but take advice on minimum wage requirements.

Does your employer cover your private mileage fuel costs?

Calculate whether it is really as good a deal as it appears. Not only has the fuel scale charge risen over the years, it is being replaced in April with a charge based on your car’s C02 emissions – which could mean another rise depending on your vehicle. Broadly speaking, if you do less than 10,000 private miles, you may effectively be paying more for a gallon of petrol than you need to.
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Inheritance Tax Planning

Want to have your cake and eat it?

A recent case lost by the Revenue allows married taxpayers a tax saving opportunity. While it lasts, a husband can give away assets to his wife using a trust and then, after a period of time, continue to receive the income from these assets. In the meantime, the assets have been successfully passed out of their joint estates for IHT purposes. With careful planning, the family home and other investments can be incorporated into these arrangements. The Revenue have appealed against the decision and there is a chance the Budget will close this loophole – so now is the time to consider it.

Do you want to pass investment assets down a generation?

You may own valuable investments that have increased substantially in value. If you were to simply gift these to your children the capital gains tax might be prohibitive. There are ways to mitigate potential CGT and IHT liabilities. Although they are complex they can be put in place fairly swiftly. Using a combination of techniques it might be possible for you to retain an income stream.

Have you got the wrong kind of assets for IHT?

If your estate consists mainly of assets which will suffer 40% IHT on your death, such as your home or quoted shares, you can change that by borrowing against those assets, and invest in IHT exempt investments such as business assets, farms, woodlands or certain unlisted shares (including AIM shares). Generally these qualify for 100% relief after two years.

Is it time to update your will?

A discretionary will trust is easy to implement and can save your family up to £100,000. At its most basic, your will provides for £250,000 to go to a discretionary trust rather than to your spouse direct. This way your estate can benefit from the nil rate band.
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Pensions

Despite current stock market conditions, pensions are an extremely valuable tax-planning tool, but it is important to regularly review the structure of your fund and the fund manager – and to benchmark performance. For some people, it could be the right time to invest more in pensions rather than less.

Approaching 75 yeas old?

Current pensions legislation states you have to buy an annuity at 75 with the remainder of your pension fund, but consider switching your fund to a new product termed the Open Annuity. You can still take income from the fund but on your death the money left passes directly into your estate. It could be particularly appropriate for those still holding Equitable Life drawdown policies. This is a complex area and advice should be sought.

Pensions Green Paper proposals

The Pensions Green Paper proposes some far-reaching changes. These are likely to be introduced – more or less in their current proposed form – from April 2004 and will apply retrospectively. Now is the time to start considering what planning you may need to do.

Do you have a pension fund in excess of £1.4 million? Pension funds may be capped at £1.4 million. This cap would apply to all approved pension schemes and any excess funds would suffer a one-off tax charge of 33% (although there is likely to be some concession for funds already worth more than this at April 2004). FURBS – unapproved occupational pension schemes funded by the employer as a supplement to approved pension schemes – may become attractive as a result. It is important to seek advice to ensure the right course of action chosen.

Planning for early retirement?

The proposals raise the age at which you can draw benefit from a pension to age 55 from 2010 (currently it is 50). Certain categories of self-employed people – (including jockeys, pop stars and footballers – can currently take their pensions at various ages from 35 years but may have to wait until 55 in future. Clearly if you are considering retirement in the near future you should seek advice as to the correct course of action.
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Investments

Considering buying a property abroad?

A second home is now considered by many to be a valuable and desirable investment with many options to buy abroad. There are lots of pitfalls in this area and local laws can sometimes appear unusual. Local advice, for instance, could be to buy the property through a local company – but that may cause problems back in the UK. If you are a shareholder and influence directors’ decisions, the Inland Revenue may treat you as a shadow director and consider your occupancy of the property as a benefit in kind. (A recent House of Lords ruling strengthened the Inland Revenue’s case). You could be taxed on the rental value of the property and be charge 5% on its value over £75,000.

Do you have life insurance-based investment bonds?

Currently you can withdraw 5% a year over the first 20 years tax deferred, but the Sandler Report (on medium and long-term savings in the UK) is recommending the removal of this 5% allowance – possibly necessitating a change of investment strategy for people taking a regular investment income from bonds.

Do you have a foreign currency bank deposits for investment purposes?

You currently pay CGT on any gain calculated at the time of every deposit or withdrawal – creating a significant compliance burden. The Inland Revenue is considering simplification – so watch out for news. This simplification may also extend to the taxation of part disposals of shares and unit acquired in monthly purchase schemes.