United Kingdom
Higher rate tax relief – don’t forget the basics! - Anthony Whatling
Following the Chancellor’s Autumn Statement on 29 November 2011, we now know that there will be no significant changes to the tax rules for individuals this tax year. It is therefore the perfect opportunity for individuals to consider what they can do over the next four months to minimise their personal tax exposure for the current year.
As the 50% top rate of income tax seems set to stay with us for a few more years, mitigating income tax will almost certainly be of interest, and there are a number of annual reliefs available.
We already know that tax relief on Enterprise Investment Scheme (“EIS”) investments is going to be more generous from 6 April 2012, but that does not mean that you should wait until then if you are minded to invest and will have income tax liabilities this year. For the current year, income tax relief is available at 30% of the amount invested, up to a maximum investment of £500,000 for EIS and £200,000 for Venture Capital Trusts (“VCT”).
As well as the income tax relief, EIS investments also provide the possibility of existing capital gains tax liabilities being deferred, and the EIS investment itself can potentially be exempt from both capital gains tax and inheritance tax. However, one should bear in mind that perhaps that one of the reasons such reliefs exist is that the nature of the investments that qualify for EIS and VCT tax relief is inherently risky, and we should always bear in mind that EIS and VCT subscriptions should remain principally investment decisions rather than tax-driven ones.
Another annual opportunity is to make the maximum annual ISA investment (currently £10,680 for this tax year). Although, a modest amount of itself, a couple can remove an additional £21,000 per year from the tax net and allow it to grow tax-free potentially in perpetuity. Per press reports over the last few years there are a number of people who, with the foresight to maximise their TESSA and (subsequently) ISA subscriptions each year (and with some lucky decisions en route) now have a seven (or in at least one case, eight) figure sum continuing to grow tax free. And for the couple with children, this year has seen the introduction of Junior ISA’s for children under the age of 18 who do not have a Child Trust Fund. The maximum amount that can be invested each year is £3,600 per child, further accelerating the growth of a family’s non-taxable savings.
For individuals with pension funds, there may be scope to take advantage of any unused Annual Allowance for earlier years (going back to 2008/09) to claim additional tax relief, and more generally, it may be relevant to some to consider protecting their pension fund against the planned restriction in the Lifetime Allowance to £1.5m from next April.
For sole traders contemplating qualifying plant and machinery expenditure over the next 12 months, it might be worth looking at whether such expenditure can be accelerated to take advantage of the Annual Investment Allowance before it is restricted from 6 April 2012.
Finally, there are also annual inheritance tax reliefs available that can be considered. As well as the annual allowance (£3,000) and the exemption for small gifts under £250 per person, “regular gifts out of surplus income” are also exempt from inheritance tax and can be an efficient way of passing wealth through the generations. Again, like the ISA, it can be a story of “little and often”. One such “regular gift out of income” might be subscriptions to Junior ISAs. According to industry calculations, even with a “modest” 4% return per annum, a fully funded Junior ISA could see in excess of £100,000 being passed to each child on their 18th birthday tax free. Even without using any ‘products’, gifting income producing assets to non- or lower rate tax payers should give you a year on year tax saving.
All in all, there is still a lot to think about between now and 5 April!
8 December 2012
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