How’s your Ostrich?

You know the time, when you would rather be doing anything else than attending to those boring financial matters. It’s normal to have a ‘head in the sand’ over matters financial. We all experience this to a lesser or greater extent.

However, the chances are if you are reading this blog that you are already on the right road to financial independence.

As the end of the tax year approaches it’s sensible to undertake a last minute check to ensure we haven’t been influenced by our own ostrich and not taken action that would act in our best interests. The good news is that 5 April 2012 falls immediately before the Easter bank holidays, maximising the time available to cater for these planning opportunities.

Some pointers might include:

Inheritance Tax (IHT)

Roy Jenkins MP famously quipped in 1986 “Inheritance Tax is broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.

For those that do trust their heirs, inheritance tax planning centres on gifting or spending capital in order to reduce the value of one’s estate. There are many exemptions available such as the annual allowance, the small gifts exemption and normal expenditure out of income, which are often widely overlooked as effective ways to reduce the burden of inheritance tax for our heirs.

Other exemptions include making gifts out of capital to an individual or create a suitable trust to house the capital.

If you are a business owner, it’s prudent to review succession planning to consider whether you are likely to benefit from business and agricultural property relief on your death, or on a lifetime gift of your business. Where this is not the case, how will IHT bills be paid and could they be mitigated?

These reliefs can have a major impact on the amount of IHT payable.

For your information, the nil-rate band is frozen at £325,000 until the 2014/2015 tax year and will then increase in line with CPI inflation. Provided the full nil-rate band is available to the estate, assets in an estate up to this amount will not normally currently incur an IHT charge.

It would be prudent to check that, if property prices recover and stock markets continue to improve, it would be worth considering the impact that this could have in relation to the frozen nil-rate band, which won’t increase until after the 2015/2016 tax year.

Income Tax

As Jean Baptiste Colbert once observed “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.

It seems that we could end up hissing if we don’t help ourselves to the available exemptions.

The Personal Allowance and the Basic Rate of Income Tax

As everyone is entitled to a standard income tax personal allowance and a basic rate income tax band, making use of these can save a considerable amount of tax. The standard personal allowance for 2012/2013 is £8,105 (increasing from £7,475 in 2011/2012), while the basic rate band reduces to £34,370 from £35,000. A high-earning spouse or civil partner holding investments in their own name should take advice on whether it is appropriate to consider holding these in their spouse/civil partner’s name before 6 April 2012.

Pensions

Pension contributions can be a valuable and tax-efficient way to reduce the income tax liability of a higher or additional rate taxpayer. Appropriate advice should be sought before the end of the tax year, to ensure that this year’s allowance has been fully used.

The timing of pension contributions is also important.

Investments

Switching income producing investments into a non-income producing form may enable you to preserve your personal allowance and advice should be sought before the end of the tax year to establish if this could apply to you.

Individual Savings Accounts (ISAs)

An ISA does not result in any taxable income or capital gains and should, therefore, be the first step when considering investing tax efficiently. All too often it is overlooked. The current ISA limit of £10,680 (of which up to £5,340 can be invested into a Cash ISA) will increase to £11,280 and £5,640 respectively from 6 April 2012. Has your ISA allowance been fully used? What about your partners?

Up to £3,600 can also now be paid into a junior ISA (JISA) opened by a parent or guardian on behalf of a minor (or by the minor if they are aged 16 plus) who is not already eligible for a child trust fund (CTF). The CTF subscription limit has also been increased to £3,600 a year.

This is another opportunity for parents and other relatives to invest tax free for their children.

Capital Gains Tax (CGT)

Every individual, including a child, is entitled to an annual CGT exemption. This is £10,600 for tax years 2011/2012 and is frozen at this level for 2012/2013. It is worth up to £1,908 (at 18%) or £2,968 (at 28%). Has your CGT allowance been fully used? What about your partners?

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All of these points and more are covered as part of our Ongoing Review Service. If you would like to know more, please contact us with no obligation on 01626 833225.

The above comments do not constitute financial advice and you are advised to obtain appropriate professional advice before proceeding further.