Tax Planning..

Tax is an unavoidable part of life, so it makes sense to get the best tax advice so you know exactly what you owe the taxman - and what you don't. By making the best use of available allowances and arranging your financial affairs to suit your indivudual tax position, then tax liabilities can be reduced.

There are four direct taxes – Income tax, National Insurance, Capital Gains Tax and Inheritance Tax. If you are both UK resident and UK domiciled, you will pay tax on your worldwide income, gains and estate. However, with care, it is possible to minimise the Income Tax and Capital Gains Tax you pay whilst mitigating future Inheritance Tax bills.

Income Tax is levied on most forms of income, earned or otherwise. Most people are aware that this tax it is charged at either 20% (basic rate) or 40% (higher rate), with an additional rate 50% band for those earning in excess of £150,000 a year. Less well known are some of the income tax system quirks. For example, pensioners caught in the “age allowance” trap (which can often be avoided) can pay an effective basic rate of 30% on part of their income. There are a number of ways it may be possible to reduce your Income Tax bills, especially for the self employed, directors of small companies and those receiving investment income.

National Insurance is charged on employment income and is payable by both employees, employers and the self employed at varying rates between 8% and 13.8%. Whilst opportunities to reduce National Insurance are limited, there are a number of measures that can be taken to reduce this liability, especially for directors of small companies.

Capital Gains Tax is charged on gains that may arise, for example, from the sale of shares, or a unit trust, or a second home. If the gains so made exceed £10,100 (tax year 2010/ 2011 & 2011/2012) then the surplus is taxed at rates starting at 18%. However, it may be possible to mitigate some of this by making loss making disposals or by spreading the sale of assets over a number of tax years. In addition, there are some financial products available that can help you minimise or defer your capital gains tax liability. A little advance planning here can save a lot of tax.

Inheritance Tax is a tax charged on your estate on death and certain lifetime transfers. The simple fact is that you do not have to be rich for your estate to be subject to Inheritance Tax. If you are single, and your estate is worth in excess of £325,000 (tax years 2010/2011 & 2011/2012), then your estate will have to pay this tax. The same applies if you are married or in a civil partnership, and your estate is worth in excess of £650,00. The rate charged is 40%, which means, for example, that a single person with an estate valued at say £500,000 will pay £70,000 in inheritance tax.

The good news is there are a host of ways to reduce this liability. Transfers and gifts between spouses and civil partners are currently free of this tax, so that no tax will be due if you leave your assets to your partner. However, tax will be due eventually when the surviving partner dies if the value of their estate is more than the threshold of £650,000.

Another way to reduce the liability is to make gifts. Any gifts made will reduce the value of your estate for Inheritance Tax as long as you survive for seven years. In addition, there are tax-efficient ways of making annual gifts, both to individuals and organisations such as charities.

A reasonable (and often heard) objection to making monetary gifts in order to reduce the value of an estate, is that the moneys might be required by the donor at a future date. However, by making gifts into certain types of trusts, you can reduce the value of your estate whilst maintaining a right to the income from the gift, or a right to the capital. If the trust on your death passes to your grandchildren, it could be decades before your money `is again under the eye of the taxman.

Another option might be to arrange a life assurance plan in such a way that the proceeds remain outside your estate, and so use the proceeds of the plan to meet the Inheritance Tax liability arising from other assets.

By using the above options, either singly or in combination, Inheritance Tax liabilities can be reduced. However, this is a highly complex area, especially where trusts are used, as gifts above a certain level to certain types of trusts can attract an immediate tax charge, and can also effectively remain in the value of the estate in certain situations should the donor die within 14 years. Here, professional advice is essential.

Tax and Investment – most forms of investment are subject to tax. For example, bank or building society interest is subject to Income Tax. Shares dividends are similarly taxed and may also be subject to Capital Gains Tax when the shares are sold. And yet, when it comes to your savings and investments, a few easy tax-planning measures can dramatically cut the tax you pay, giving a healthy boost to the returns you can get.

Some of these measures are straighforward, for example, a higher rate taxpayer can save tax by transferring money into a lower earning – or non-earning – spouse’s name. Another straightforward measure, which is often overlooked, is making full use of your annual Capital Gains Tax exemption.

Various types of investments can provide significant tax advantages, the best known probably being pensions (which get tax relief on contributions) , ISAs (on which no Income Tax or Capital Gains Tax is payable) and some National Savings products (such as Premium Bonds which provide tax free returns).

It’s not only tax free investments that can help to reduce tax, this can also apply to tax deferred investments. For example, life assurance bonds allow you to fund the policy with a single lump-sum investment and then draw a regular income of up to 5% without any immediate tax liability, no matter what your tax position. It may also pay to consider offshore bonds, based in tax havens like Jersey or the Isle of Man, depending on an investor’s tax position.

The above options are not an exhaustive list, but are some of the more common measures that can be taken to reduce the tax you pay on your investments to the absolute minimum.

At Coast to Coast, we have the experience and qualifications that enable us to provide personalised independent financial planning advice for your specific tax planning needs.

Following an initial meeting which is conducted without charge or obligation, and at which we will examine all relevant issues, we will also discuss the appropriate payment options if you wish us to act for you. In the overwhelming majority of cases this will be through a fixed fee which will be agreed with you prior to any work being done.

In our experience many tax planning enquiries relate to structuring investment portfolios, and therefore investment advice is also required. If any part of the investment planning process involves arranging products that pay a commission, this can be offset against the agreed fee. Once again, by working on this basis, you get a guarantee that you won’t be "sold" anything, and that the advice you will be getting is truly independent.

The FSA does not regulate some forms of Tax Planning.