Now everyone is feeling the pinch in this increasingly harsh economic climate, it seems a good moment to double check were our money is going. As tax is not part of our discretionary spend it is good sense to do some housekeeping to ensure our outgoings in this particular area are kept to the absolute minimum.
Make the most of tax favoured investments by fully utilising your ISAs, pension scheme, National Savings scheme and even premium bond investments which all enjoy their own tax breaks.
Structure your investments so they generate capital gains (carrying a rate of tax at 18% or 20%) as opposed to income (potentially taxable at 40% or even 50%.)
With more people owning second homes, ensure you have at least considered an election for your main residence – the rules can be legitimately used to create substantial tax exemptions. If you are borrowing to fund property acquisitions look carefully at how this is structured to maximise the amount which can be set against your rental income and thus reduce your tax bill.
If you are acquiring an investment property consider ownership with your spouse/partner as “tenants in common” – this allows ownership in proportions other than 50:50 so that more income can be generated to the lower rate taxpayer.
Review your share portfolios – even if you have not disposed of any, if they have become of “negligible value” it may be possible to make a claim to crystalise your capital loss. If you hold any shares in unquoted trading companies you may even be able to claim the loss against your income!
Pensions have had much negative press over recent years. However they remain one of the few investments you can make where HMRC will actually directly make a cash contribution. This can be particularly attractive to an older investor, whose tax rate may be about to drop from 40% to the lower rates.
For example a one-off pension of say £40,000 grosses up £50,000 with HMRC “contributing” £10,000. With a current tax rate at 40% then additional tax relief of £10,000 would be available. Assuming an age of 55, it would be possible to take a tax free lump sum of 25% being £12,500, leaving a pension pot of £37,500. Assuming an annuity return of say 5%, this would give annual income of £1,875 per annum.
The net cost of the contribution would be £40,000 – £ 10,000 tax relief – £12,500 tax free lump sum = £17,500. So in effect topping up your pension by £1,875 per annum would cost say £17,500 net which is a 10.7% return.
However, individual circumstances vary and you should always seek professional advice before taking any action.
Owen Kyffin is tax partner with Whitley Stimpson LLP, with offices in High Wycombe and Banbury, and can be contacted on 01295 270200 or by e mail at email@example.com.