By ADRIAN LOWCOCK 16/02/2012
Now is the time to make sure you have everything in place to make the most of tax allowances and reliefs for this tax year. You may have only just been through the ordeal of submitting an online self-assessment tax return for last year. But now it’s your chance to turn the tables on the taxman – and you could even be looking forward to receiving a cheque from him next year.
Here are our 7 top tips. Remember, you need to act before Thursday 5 April.
1. Pension Tax Relief
There is no other investment that gives you the tax breaks of a pension. Quite simply, when you put money in you will receive a boost from the taxman. You can invest as much as you earn in pensions, subject to an annual allowance of £50,000 a year. And, you’ll generally be able to benefit from tax relief up to your highest marginal rate of tax (40% or 50% for many investors).
2. Pension carry-forward
If you had a pension plan in place for the last few years, you may also be able to take advantage of an additional allowance. You can carry forward unused allowances from the last three tax years to set against earnings for 2011/12. This means that, depending on your circumstances, you could contribute up to £200,000 this year and receive up to 50% tax relief a total possible saving of £100,000.
This is particularly relevant to those high earners who in 2009/10 were restricted from making contributions when the rules were abruptly changed with the £20,000 cap. Note that you don’t necessarily need to make carried-forward contributions to an existing pension, so you could choose to use a low-cost SIPP such as the Best SIPP.
3. Use your Capital Gains Tax Allowance
You can sell investments that are held outside of a tax-wrapper and pay no tax on any gain up to your annual exemption limit of £10,600. Equally, if you have losses, you can use these to offset any gains above the allowance this year or carry forward these losses to offset future gains. You can then reinvest the money if you wish (although you have to wait at least 30 days before buying back the same investment).
4. Bed and ISA
This is a way of making use of all the tax benefits of holding investments in an ISA without investing new money. This is particularly relevant where you have capital gains that can be realised within the annual CGT allowance (see above). You can then reinvest back into the same investment but inside your ISA. This is a good way to reduce exposure to a large investment that might trigger future capital gains tax. The same can be done for SIPP investments (‘Bed and SIPP’).
5. Bed and Spouse
Similar to selling an investment and buying it back inside an ISA but this time one partner sells the investment and the other buys the same investment back. The gain is realised by one investor and a new cost is attributed to the other spouse’s acquisition, effectively rebasing the purchase cost for capital gains tax purposes.
6. VCT tax relief
Invest in new shares in a VCT and you can claim an income tax rebate of 30% if you have paid sufficient tax. The VCT shares must be held for at least five years.
Dividends paid by VCTs are not liable to any tax and there is no capital gains tax on selling. Combined, these tax benefits can be attractive for some investors, but not all. Bear in mind that most VCTs will be invested in small UK companies so they entail higher risk and can be expensive. Make sure you understand the risks of VCTs before investing just to get the tax benefits. (See VCT Guide).
7. VCT rollover
Some VCT managers are offering existing shareholders the opportunity to sell their shares back to the VCT manager via an enhanced buyback at a small discount to the normal discount to Net Asset Value on the condition they reinvest the money back into the same VCT via a top up offer. Effectively, existing investors can recycle the investment but get a second opportunity to benefit from the 30% income tax relief for holding the same investment. Proven VCT and Foresight 3 both offer this and look attractive.
Last but not least, don’t forget to make use of your ISA allowance. This won’t have a big impact on cutting your tax bill for this year but will shelter your investments from future capital gains tax and any additional tax on income.
Useful links
VCTs should be regarded as higher risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon of greater than five years. Past performance is not an indication of future performance. Share values and income from them may go down as well as up and you may not get back the amount originally invested. Owing to the nature of their underlying assets, VCT's are highly illiquid.
Investors should be aware that they may have difficulty, or be unable to realise their shares at levels close to that that reflect the value of the underlying assets. You should only subscribe for new VCT shares on the basis of the relevant prospectus and must carefully consider the risk warnings contained in that prospectus. The information in this video is for educational and leisure purposes only and should not be taken as advice.
Tax levels and reliefs may change and the availability of tax reliefs will depend on individual circumstances. The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.